The U.S. Dollar’s Unofficial Status as World Currency

When you travel around the world, it’s not uncommon to find that the United States dollar (USD) has become engrained in a foreign country’s economy.

While official dollarization may be well-documented, the murky world of unofficial dollarization is not. Unofficial dollarization occurs when a country’s people use the U.S. dollar for their transactions on a daily basis but the country’s government hasn’t classified it as legal tender.

Read on to learn more about the dollar’s unofficial status as the world’s currency, why it is so popular, and how U.S. dollars that move into and out of the U.S. are tracked.

The World’s Reserve Currency

During the eighteenth and nineteenth centuries, the British pound reigned as the world’s reserve currency.

In the twentieth century, the U.S. dollar laid claim to this title. In fact, it has been the dominant reserve currency since the end of World War II.

Types of Dollarization

Dollarization is a term that can fall into three categories:

1. Official dollarization: The dollar is the only legal tender; there is no local currency. Examples of this can be seen in El Salvador and Ecuador.
2. Semi-dollarization: A country uses both its own currency and the U.S. dollar interchangeably as legal tender. Panama, Nicaragua, and Cambodia are good examples of countries that do this.
3. Unofficial dollarization: In many countries in the developing world, the dollar is widely used and accepted in private transactions, but it is not classified as legal tender by the country’s government.

While many people associate dollarization with the U.S. dollar, the association is not exclusive. The euro, South African rand, Russian ruble, New Zealand dollar and Australian dollar are also accepted outside their countries, although in a localized nature.

For example, the Russian ruble is accepted in a number of countries associated with the old Soviet Union.

Foreign Reserve Currencies

Foreign reserve currencies are the currencies that the central banks of various countries hold in reserve for use under different circumstances.

For example, a country might hold a reserve of another country’s currency to pay for goods from that other country.

In addition, a country might need such currency reserves to make payments on debt owed to foreign countries. Or, it may need the reassurance of access to financial markets that a reserve of a particular currency, such as the USD, provides.

Here is a breakdown of the allocations of foreign currencies held in reserve that countries reported to the International Monetary Fund, as of the fourth quarter of 2024:

• U.S dollars: 57.39%
• Euro: 20.02%
• Japanese yen: 5.82%
• British pound sterling 4.97%
• Canadian dollars: 2.74%
• Australian dollars: 2.27%
• Chinese renminbi: 2.17%
• Swiss francs: 0.16%
• Combined other currencies: 4.46%

The Popularity of the U.S. Dollar

Stability is one of the major factors that explains why a number of countries have adopted the U.S. dollar as their official currency or hold it in reserves.

The U.S. dollar has only been deliberately devalued once—as part of the Roosevelt administration’s gold policy—and its notes have never been invalidated.

For countries all too familiar with bank failures, devaluation and inflation, the stability of the U.S. dollar brings with it a certain amount of peace of mind. Business is easier to conduct when a stable currency is used.

Additionally, foreign countries like the U.S. dollar because of the political stability of the U.S. They’re known to maintain reserves in the currency of a country such as the U.S. that has large, liquid financial markets.

This reassures other governments that they can tap financial resources at critical times. For example, certain governments hold U.S. government bonds because they should have no trouble selling them for cash, if need be.

Downside of Dollarization

Unofficial dollarization can be so prevalent in some countries that more U.S. currency is in circulation than local currency.

Once this happens, it can be difficult to reverse. Ironically, the very stability that dollarization brings can be a curse to local governments, as they lose the power to control inflation and fiscal policy.

However, what’s difficult for a government is a blessing to others who simply want to conduct daily, private transactions without trouble.

The U.S. dollars circulating in foreign countries can present other problems. For example, $100 bills have a reputation of being vulnerable to counterfeiting. As a result, they also tend to be the ones that are most rejected or discounted around the world.

And long gone are the days when bills denominated in $500, $1,000, $5,000 and even $10,000 circulated. That’s because money launderers love large U.S. bills. And they prefer the anonymity of U.S. dollars as they move them around the world.

Flow of Dollars Overseas and Back to U.S.

To get a better handle on how many U.S. dollars are outside of the U.S., the U.S. Customs Service tracks cross-border flows through its Currency and Monetary Instrument Reports (CMIR).

It’s required to be filed whenever someone or some business ships or carries out of the U.S. more than $10,000. Likewise, it’s required whenever more than $10,000 is brought back into the U.S.

It’s the most important source of information on the movement of U.S. dollars. Large financial institutions specialize in the transportation of large wholesale bulk shipments of U.S. dollars. The shipper must record on the CMIR, the size, origin and destination of the shipment.

The Bottom Line

Stability, acceptability, and anonymity are all reasons why the U.S. dollar has become and will continue to be into the foreseeable future the world’s currency of choice.

Despite its popularity, however, don’t become too enamored of the U.S. dollar. No currency has held on to the title of “currency of choice” forever.