That was the government's argument. The defendant clearly disagreed. Arguably they were closer to "real dollars" (defined by the Coinage Act of 1792 to consist of 416 grains, or about 0.95 ounces, of standard silver) than anything the government has minted recently. A bit better, even.

The dollar sign and the word "dollar" are not unique to US currency and in fact predate the US entirely. Likewise for the word "liberty" or the phrase "trust in God"—if anything that last would probably be deemed a blatant violation of the separation of Church and State if the government actually put it on their currency. These are just generic elements common to many currencies and US culture. Even the initials "USA" don't actually imply any endorsement by the US government; you can find them on just about everything these days. The intent was patriotism, not confusion. The same would have been true if they had spelled out "United States of America" like the official coins, though of course they didn't do that.

Any actual confusion can more readily be blamed on the US Mint for making their coins too generic than on NORFED for making theirs too similar. At least NORFED put their name in their design; the US Mint did not.