By JP Koning, submitted by BullionStar.com

There are a number of reasons why foreigners demand U.S. dollars. A few nations including Panama, Ecuador, and El Salvador are dollarized. They no longer have their own currency but are wholly dependent on U.S. dollar for trade. There is an even longer list of countries that are partially-dollarized. While Argentina, Angola, Cambodia, Nicaragua, and Russia each maintain local currencies, it is common for U.S. dollars to be used in a portion of their domestic transactions.

Nations tend to dollarize because they have experienced high domestic inflation. Because the purchasing power of dollars is much more reliable than that of a weak domestic currency, individuals and businesses develop a habit of using dollars for making transactions or hoarding wealth. Even years after the domestic inflation has been contained, this habit remains.

Dollars are also popular in the international drug trade. Criminals require secrecy, and by their nature banknotes are a privacy-preserving form of payment. Because U.S. dollars are so liquid, they have become the preferred medium for illicit international business dealings.