diff --git a/IPython/core/tests/test_interactiveshell.py b/IPython/core/tests/test_interactiveshell.py
index e9c1f5e..6ed510f 100644
--- a/IPython/core/tests/test_interactiveshell.py
+++ b/IPython/core/tests/test_interactiveshell.py
@@ -201,7 +201,10 @@ class InteractiveShellTestCase(unittest.TestCase):
 
     def test_var_expand(self):
         ip = get_ipython()
-        ip.user_ns['f'] = 'Ca\xc3\xb1o'
+        ip.user_ns['f'] = u'Ca\xf1o'
+        self.assertEqual(ip.var_expand(u'echo $f'), u'echo Ca\xf1o')
+
+        ip.user_ns['f'] = b'Ca\xc3\xb1o'
         # This should not raise any exception:
         ip.var_expand(u'echo $f')
 
diff --git a/IPython/utils/tests/test_text.py b/IPython/utils/tests/test_text.py
index 1d0b70a..ac09c2b 100644
--- a/IPython/utils/tests/test_text.py
+++ b/IPython/utils/tests/test_text.py
@@ -107,3 +107,7 @@ def test_dollar_formatter():
     nt.assert_equals(s, "12")
     s = f.format("$n/{stuff[:5]}", **ns)
     nt.assert_equals(s, "12/hello")
+    s = f.format("$n $$HOME", **ns)
+    nt.assert_equals(s, "12 $HOME")
+    s = f.format("${foo}", foo="HOME")
+    nt.assert_equals(s, "$HOME")
diff --git a/IPython/utils/text.py b/IPython/utils/text.py
index ba16e05..6ec0d7b 100644
--- a/IPython/utils/text.py
+++ b/IPython/utils/text.py
@@ -663,20 +663,26 @@ class DollarFormatter(FullEvalFormatter):
     In [4]: f.format('$a or {b}', a=1, b=2)
     Out[4]: u'1 or 2'
     """
-    _dollar_pattern = re.compile("(.*)\$([\w\.]+)")
+    _dollar_pattern = re.compile("(.*?)\$(\$?[\w\.]+)")
     def parse(self, fmt_string):
         for literal_txt, field_name, format_spec, conversion \
                     in Formatter.parse(self, fmt_string):
             
             # Find $foo patterns in the literal text.
             continue_from = 0
+            txt = ""
             for m in self._dollar_pattern.finditer(literal_txt):
                 new_txt, new_field = m.group(1,2)
-                yield (new_txt, new_field, "", None)
+                # $$foo --> $foo
+                if new_field.startswith("$"):
+                    txt += new_txt + new_field
+                else:
+                    yield (txt + new_txt, new_field, "", None)
+                    txt = ""
                 continue_from = m.end()
             
             # Re-yield the {foo} style pattern
-            yield (literal_txt[continue_from:], field_name, format_spec, conversion)
+            yield (txt + literal_txt[continue_from:], field_name, format_spec, conversion)
 
 
 def columnize(items, separator='  ', displaywidth=80):