Authorities hope the new measure will halt a currency crisis underlining the country's years-long economic troubles.
Reserve Bank of Zimbabwe governor John Mushayavanhu said the new currency will be called ZiG, and will be anchored on gold reserves and a basket of foreign currencies.
It goes into effect on Monday.
The Zimbabwe dollar has come under sustained pressure in recent weeks, making it one of the world's worst performing currencies.
Since January, the Zimbabwe dollar lost more than 70 per cent of its value on the official market, and was plunging even further on the thriving but illegal black market.
Inflation increased from 26.5 per cent in December last year to 34.8 per cent this January before spiking to 55.3 per cent in March, according to official figures.
Traders were increasingly rejecting lower denominations of the now scrapped currency, with many insisting on payment only in US dollars, which are also legal tender in the country.
"We are doing what we are doing to ensure that our local currency does not die. We were already in a situation where almost 85 per cent of the transactions are being conducted in US dollars," Mushayavanhu told reporters in the capital Harare.
People have three weeks to exchange the old notes with the new currency, he said.
Friday's announcement is the latest of a cocktail of currency measures undertaken by the Zimbabwean government since the initial spectacular collapse of the Zimbabwe dollar in 2009.
At the time the country at one point issued a 100 trillion Zimbabwe dollar banknote before the government was forced to temporarily scrap its currency and allow the US dollar to be used as legal tender.
The country re-introduced a domestic note in 2016, marking the beginning of another round of currency volatility highlighted by changes to currency policy that included the banning of foreign currencies such as the US dollar for domestic transactions in 2019.
This was followed by the unbanning of the greenback a while later after few ordinary people took heed to the US dollar ban and the black market thrived while the local currency quickly depreciated.
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