What Countries Use the US Dollar Officially and Unofficially?

The U.S. dollar holds a prominent position in the global financial system. Established as the world’s foremost reserve currency by the Bretton Woods Agreement of 1944, the dollar is widely held by central banks, foreign companies, and individuals worldwide. Its status is a result of the economic stability of the United States, the liquidity of its financial markets, and the perceived reliability of its legal framework. Its widespread acceptance means the dollar functions as a medium of exchange within the U.S. and plays a significant role in international trade and finance. The dollar’s global presence manifests in various forms, from official adoption by sovereign nations to informal acceptance in daily transactions.

Countries Officially Using the USD

Several countries have formally adopted the U.S. dollar as their sole legal tender, a process known as official dollarization. This decision is often driven by a desire for economic stability, particularly in nations that have experienced severe inflation or currency crises. By embracing the dollar, these countries aim to import the monetary discipline and anti-inflationary credibility of the U.S. Federal Reserve.

Panama, for instance, has used the U.S. dollar alongside its Panamanian balboa as legal tender since 1904, maintaining a 1:1 conversion rate. Ecuador adopted the U.S. dollar in 2000 following a severe financial crisis, seeking to combat hyperinflation and restore economic confidence. Similarly, El Salvador transitioned to the dollar in 2001 for comparable reasons, aiming to stabilize its economy and integrate more closely with international markets.

Other nations that officially use the U.S. dollar include:

• East Timor (adopted 2000)
• Zimbabwe (uses USD alongside other currencies due to hyperinflation)
• British Virgin Islands and Turks and Caicos Islands (British Overseas Territories)
• Palau, Federated States of Micronesia, and Marshall Islands (used USD since 1944, chose not to issue own currencies after independence)
• Caribbean Netherlands (Bonaire, Sint Eustatius, and Saba, adopted 2011)

Countries with Currencies Pegged to the USD

Many countries peg their national currency to the U.S. dollar, maintaining a fixed exchange rate. This differs from official dollarization as these nations issue their own currency but manage its value relative to the U.S. dollar. The objective of a currency peg is to provide stability to the local currency, preventing sudden shifts in its value. Central banks in these countries intervene in foreign exchange markets to uphold the predetermined exchange rate.

Over 66 countries have their currencies pegged to the U.S. dollar. This strategy is employed by economies with strong trade ties to the U.S. or those seeking to control inflation. For instance, many oil-producing nations in the Middle East, such as Saudi Arabia, the United Arab Emirates, Oman, and Qatar, peg their currencies to the dollar. This practice helps stabilize their oil revenues, which are typically denominated in U.S. dollars. The Saudi riyal has been pegged at 3.75 SAR per USD since 1987, and the UAE dirham has maintained a fixed peg of 3.67 AED per USD since 1997.

Caribbean nations like the Bahamas, Bermuda, and Barbados also peg their currencies to the U.S. dollar. This is largely because their economies heavily rely on tourism, with a significant portion of income generated in U.S. dollars. The Barbadian dollar, for example, is permanently tied at a rate of 2:1 to the USD. Hong Kong maintains a currency board system, pegging the Hong Kong dollar to the U.S. dollar within a narrow band, which supports its status as a global financial hub. This peg, established in 1983, has helped maintain economic stability through various financial crises.

Countries Where the USD is Widely Accepted

Beyond official adoption or currency pegging, the U.S. dollar is widely accepted for transactions in many countries where it is not legal tender. This informal use often occurs due to significant tourism from the U.S., substantial remittances, or local currency volatility. In these economies, while a domestic currency exists, the U.S. dollar serves as a convenient alternative for larger purchases or as a store of value.

In countries like Mexico, particularly in border areas and major tourist destinations, the U.S. dollar is commonly accepted. Businesses in tourist-heavy regions of Aruba, Barbados, and the Bahamas widely accept U.S. dollars, often interchangeably with their local currencies. Lebanon, facing economic instability, sees widespread use of the U.S. dollar alongside the Lebanese pound for many transactions. Cambodia is another example where U.S. dollar notes circulate freely and are often preferred for larger purchases, with the local riel used for smaller change. In some instances, such as in parts of Costa Rica and Honduras, the U.S. dollar is commonly accepted, even though it is not officially recognized as legal tender. This widespread unofficial acceptance reflects the dollar’s perceived stability and its role in facilitating international economic activity.

Factors Influencing USD Adoption and Pegging

The decision to adopt or peg to the U.S. dollar is influenced by various economic and policy considerations. A primary driver is macroeconomic stability, particularly in the face of high inflation. By abandoning an unstable domestic currency, countries aim to curb price increases and foster a more predictable economic environment. This can enhance confidence among both domestic and international investors.

Another factor is the facilitation of international trade and investment. Linking a currency to the dollar reduces foreign exchange risk for businesses, making trade simpler and more predictable. This predictability can attract foreign direct investment, as investors face less uncertainty regarding profit repatriation. Countries heavily reliant on exports often peg their currency to the dollar to maintain competitive pricing in major markets.

The U.S. dollar’s role as the world’s primary reserve currency also contributes to its adoption. Central banks worldwide hold substantial reserves of U.S. dollars, and major commodities like oil are predominantly bought and sold in dollars. Aligning with the dollar can provide access to global capital markets and simplify financial transactions. However, adopting or pegging to the dollar means a country relinquishes control over its monetary policy, effectively outsourcing it to the U.S. Federal Reserve. This means the dollarizing nation’s economy becomes more susceptible to U.S. economic conditions and interest rate decisions.