Which Countries Use Dollars as Their Currency?

Many countries across the globe utilize currencies named “dollar,” a term often associated with the United States. However, many other nations issue their own distinct currencies also bearing the name “dollar.” This diverse use reflects historical ties, economic stability goals, and international trade relationships.

Nations Officially Adopting the US Dollar

A number of sovereign nations have formally adopted the United States Dollar (USD) as their primary legal tender, completely replacing their former national currencies in a process known as full dollarization. This monetary shift is often driven by a desire for economic stability, particularly in the face of hyperinflation or severe financial crises. Such adoption means these countries relinquish independent monetary policy, as their currency supply is controlled by the U.S. Federal Reserve.

Panama officially adopted the US dollar in 1904, shortly after gaining independence from Colombia. While the Panamanian Balboa exists only in coin form, it is pegged at a 1:1 ratio to the USD, which circulates as paper currency. Ecuador transitioned to the US dollar in 2000, prompted by a severe economic crisis that led to hyperinflation and the collapse of its national currency, the Sucre.

El Salvador followed suit in 2001 under the Law of Monetary Integration. Similarly, Timor-Leste adopted the USD in 2000 following its independence from Indonesia. Zimbabwe introduced a multi-currency system, predominantly featuring the USD, in 2009 to combat extreme hyperinflation that had rendered its own currency virtually worthless.

The Pacific island nations of Palau, the Marshall Islands, and the Federated States of Micronesia have used the US dollar as their official currency since the mid-20th century, largely due to historical ties and Compacts of Free Association with the United States. Other territories that officially use the US dollar include the British Virgin Islands and Turks and Caicos, and the Caribbean Netherlands (Bonaire, Sint Eustatius, and Saba), which adopted the USD in 2011.

Nations Pegging Their Currencies to the US Dollar

While some nations fully adopt the US dollar, others opt for a different approach by pegging their own national currencies to it. A currency peg, also known as a fixed exchange rate, involves a country formally linking the value of its domestic currency to a foreign currency, typically the US dollar, at a specific, predetermined rate. This differs from full dollarization because the country retains its own currency and its central bank, which actively intervenes in the foreign exchange market to maintain the fixed rate.

This system offers predictable exchange rates, beneficial for international trade and investment. Many countries choose to peg their currencies to the US dollar due to its relative stability and role as the world’s primary reserve currency. This helps reduce foreign exchange risk for businesses and investors, fostering greater confidence. It can also serve as a tool for controlling inflation, as the domestic currency’s value is anchored to a more stable foreign currency.

Numerous countries maintain such pegs. The Hong Kong dollar (HKD) has been pegged to the US dollar since 1983. Many oil-producing nations in the Middle East, including Saudi Arabia (SAR), the United Arab Emirates (AED), Bahrain (BHD), Oman (OMR), and Qatar (QAR), also peg their currencies to the US dollar. This is largely due to oil being priced internationally in USD, which helps these nations stabilize revenues.

Caribbean nations like the Bahamas, Barbados, and Belize, along with countries using the Eastern Caribbean Dollar (XCD), often peg their currencies to the USD. Their economies frequently rely on tourism, with significant revenue generated in US dollars, making a peg a practical choice. Other countries that peg their currencies to the US dollar include Jordan (JOD), Lebanon (LBP), Djibouti (DJF), and Eritrea (ERN). These pegs require continuous monitoring and intervention by central banks.

Nations Using Other Dollar-Named Currencies

Beyond the direct adoption or pegging to the US dollar, many other nations issue their own sovereign currencies also named “dollar.” These currencies are distinct from the United States Dollar, managed by their respective central banks, and fluctuate in value based on their own economic conditions. Sharing the “dollar” name often stems from historical decimalization of former pound-based systems.

The Australian Dollar (AUD) serves as the official currency for Australia and its external territories, including Christmas Island, Cocos (Keeling) Islands, and Norfolk Island. It is also the official currency for the independent Pacific Island states of Kiribati, Nauru, and Tuvalu. The Canadian Dollar (CAD) is the national currency of Canada.

New Zealand issues the New Zealand Dollar (NZD), which is also used in several associated territories:
Cook Islands
Niue
Tokelau
Pitcairn Islands
In Southeast Asia, the Singapore Dollar (SGD) is the official currency of Singapore. A Currency Interchangeability Agreement allows the Singapore Dollar to be accepted as customary tender in Brunei, alongside the Brunei Dollar (BND).

The Eastern Caribbean Dollar (XCD) is a shared currency among eight island nations and territories:
Anguilla
Antigua and Barbuda
Dominica
Grenada
Montserrat
Saint Kitts and Nevis
Saint Lucia
Saint Vincent and the Grenadines
Jamaica uses its own Jamaican Dollar (JMD). Liberia also has its Liberian Dollar (LRD), which circulates alongside the US dollar but is managed by its own central bank. Lastly, the Solomon Islands utilize the Solomon Islands Dollar (SBD) as their national currency.

The Mechanisms Behind Dollar Adoption and Pegging

Countries choose to adopt foreign currencies or peg their own to a major currency like the US dollar for various economic and monetary policy reasons. These decisions aim to achieve greater stability and foster economic growth. The primary mechanisms involved are dollarization and currency pegs, each with distinct implications for a nation’s financial sovereignty.

Dollarization describes the process where a country integrates a foreign currency into its monetary system. Full dollarization, also known as official or de jure dollarization, occurs when a nation completely replaces its domestic currency with a foreign one, such as the US dollar, as its sole legal tender. This eliminates the domestic central bank’s ability to print money and conduct independent monetary policy. Alternatively, partial dollarization, or de facto dollarization, involves a foreign currency circulating alongside the domestic currency, often used for significant transactions or as a store of value, while the local currency remains official.

The motivations for dollarization often stem from a desire to achieve price stability and control rampant inflation. By adopting a stable foreign currency, a nation can effectively import the inflation rate of the issuing country, thereby curbing its own inflationary pressures. This also reduces exchange rate risk, making international trade and investment more predictable and lowering transaction costs associated with currency conversions. Such a move can enhance financial credibility and boost investor confidence, attracting foreign direct investment by signaling a commitment to sound economic management. A notable cost of dollarization is the loss of seigniorage, which is the revenue a government earns from issuing its own currency.

A currency peg involves a country maintaining its own distinct national currency but formally fixing its exchange rate to a foreign currency or a basket of currencies. This mechanism aims to stabilize exchange rates, which benefits international trade and investment by reducing currency volatility. The central bank actively intervenes in the foreign exchange market, buying or selling its own currency to uphold the fixed rate. A specific and more rigid form of a currency peg is a currency board, where the monetary authority is legally bound to fully back the domestic currency in circulation with foreign reserves.

Both dollarization and currency pegs serve to anchor a country’s currency to a more stable external standard, thereby fostering economic predictability. However, a significant consequence of both approaches is the relinquishment of independent monetary policy. A nation that dollarizes or pegs its currency cannot use traditional monetary tools like adjusting interest rates or controlling the money supply to respond to domestic economic shocks. This loss of monetary autonomy means the country’s economic fate becomes more closely tied to the monetary policy decisions of the anchor currency’s issuing nation, requiring careful consideration of domestic economic conditions relative to the anchor country.