Travelling around the world used to require many changes in currencies at each foreign stop, but since the end of World War two, one currency has reigned supreme.  The US dollar.  Its hard to find a country that hasn’t already added large amounts of dollars to their treasury or moved large sums in and out of the currency.

The dollar is the most widely held foreign exchange bill.  Officially, the dollar makes up 66% of the worlds foreign reserves.  That’s two-thirds of every currency in a treasury is USD.

The actual term for the proliferation of the US dollar is Dollarization.  There are three main types of dollarization:

Official Dollarization:  There is no local legal tender and thus the US dollar is legal tender.  This happens in places such as Panama, El Salvador and Ecuador.  The US government does not have the power to provide approval for countries to use the US currency.  Thus, the US dollar is a perfect treasury note for a growing country.  The citizens of the three countries above also enjoy the ability to exchange the currency quickly and easily, a privilege they may not have if their countries created their own currency.  The use of the dollar also helps market products to US consumers, who we all know have deep pockets but debt to their eyeballs.

Semi Dollarization:  The use of a local currency and also wide acceptance of the US Dollar.  These countries have their own established currencies but will also accept the US Dollar readily, without exchanging.  Both Lebanon and Cambodia are two countries that operate under this system.

Unofficial Dollarization:  Many developing countries use and accept the US dollar as a form of payment but it is not officially on the books.  Small countries with a lot of US foreign investors would be more accepting of a foreign currency for large payments or from foreign investors.

But why the USD?

The US dollar is one of the most stable currencies because of the governmental unit behind it.  The government of the United States cannot purposely devalue the Dollar to make it more appealing to foreigners, nor to benefit itself from higher exchange rates.  US inflation is on par with many of the superpowers of the world and certainly better than developing nations, thus the US dollar also provides a sense of security to smaller, lesser developed nations.

In problematic or war torn nations, unofficial dollarization has become normal.  In some cases, the value of US dollars in circulation becomes greater than the official currency.  This restricts the power of these nations in economic policy as they cannot control the production or destruction of the value of US Dollars.

It is estimated that 40-60% of all US dollar bills circulate outside of US borders.  This brings even more problems due to overseas counterfeiting.  The US government is without jurisdiction to catch counterfeiters, ultimately creating a higher inflation statistic.  The US Dollar allows some anonymity as it is not tracked well outside of US Borders.  Because of its value, liquidity and acceptance worldwide, it is the currency of choice for illegal operations.