The U.S. dollar and the euro are the two most common currencies in the world. Both are used as reference and reserve currencies for their prevalence and long-term stability.
History of the Dollar
The Coinage Act of 1792 established the U.S. dollar at $4.80 per British pound. The dollar was based largely on the Spanish dollar and was backed by gold until 1971, meaning that the government held gold in reserve guaranteeing that every dollar could be exchanged for gold in a currency crisis. The United States Mint prints dollars in denominations of $1, $2, $5, $10, $20, $50 and $100. At one time, the Mint printed bills of $500, $1,000, $5,000, $10,000 and $100,000, but President Nixon removed them from circulation in 1969.
History of the Euro
The European Union launched the euro in January 1999, though it did not become legal tender until 2002. EU members had been attempting to establish a common currency for 20 years after the European Monetary System’s failed attempt to stabilize European currencies against the dollar during a recession in the 1970s. The euro comes in 1 and 2 euro coins, and in notes of 5, 10, 20, 50, 100, 200 and 500. For notes, each denomination has its own color and design scheme dedicated to a different period of European architecture.
Of the 15 countries in the EU, 12 use the euro as of April 2010. These 12 countries are known as the Eurozone. The euro is regulated by the European Central Bank, which coordinates monetary policy for all 12 countries. In order to use the euro, Eurozone countries must agree to give up much of their national sovereignty with regards to creating monetary policy.
The euro has appreciated against the dollar since it was introduced in 1999, with a low of one euro for 82 cents in October 2000 and a high of one euro for $1.59 in July 2008. The dollar has declined as the U.S. trade deficit and foreign debt have increased, though a budget crisis in Greece in late 2009 caused the euro to depreciate. The fluctuating exchange rate affects the flow of trade between the U.S. and the EU, which have a massive bilateral trade and investment relationship. Trade and investment between the U.S. and the EU accounted for 40 percent of world trade and 60 percent of global GDP in 2009, according to the European Commission. A weak dollar is good for U.S. exports to the EU, while a strong dollar encourages Americans to travel.
The dollar reigns as the most prevalent currency in the world. Most governments hold millions in dollar reserves, and the dollar is the most-traded currency on international markets. The euro is the second most prevalent currency in terms of government and commercial bank reserves, as well as trading on international markets. However, in 2009, the euro passed the dollar as the most circulated currency, with 790 billion in notes and coins in circulation around the world.
Calla Hummel is a doctoral student studying contraband in international political economy. She supplements her student stipend by writing about personal finance and working as a consultant, as well as hoping that her investments will pan out.