Unlike many similar languages, in Javascript an identifier (such as a variable name) may contain a dollar sign or even start with a dollar sign.
In some languages it may be convention to use the underscore (_) for special purposes at the start of an identifier, for example I've seen people use the underscore to indicate local variables.
In Javascript, either a dollar sign or underscore may be used for special purposes. Generally, an identifier beginning with a dollar sign is intended for "generated" code - this was suggested in a spec - but what you use it for is generally your own business, though it's generally not used in normal circumstances.
In your example, it looks like whoever chose the name '$item' for their variable may by a PHP programmer who did it out of habit, or something. In PHP, all variable names must start with a dollar sign.
Interestingly, having an identifier that is just a dollar sign, and nothing else, is something that jQuery does for its topmost-level object. It would be a good idea, if jQuery was the only thing in the world to use that identifier name. But it isn't, and therefore it isn't (a good idea), which you'll discover when you try to combine jQuery and Prototype, or any of the other libraries doing the same.
It would be much better for a Javascript library to use a distinctive, uppercase word as an identifier like YAHOO (as used in YUI).
That said, jQuery is a good library and it is not too difficult to make it use some other name than '$' if you need it to share with another library.