Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States. The term was originally applied to U.S. dollar accounts held in banks situated in Europe, but it expanded over the years to cover U.S. dollar accounts held anywhere outside the U.S. Thus, a U.S. dollar-denominated deposit in Dubai or Singapore would likewise be deemed a Eurodollar deposit (sometimes an Asiadollar). More generally, the euro- prefix can be used to indicate any currency held in a country where it is not the official currency, broadly termed "eurocurrency", for example, Euroyen or even Euroeuro. There is no connection with the euro currency of the European Union.
Eurodollars facilitate global trade and investment and liquidity.
History
After World War II, the quantity of physical U.S. dollar banknotes outside the United States increased significantly, as a result of both the dollar funding of the Marshall Plan and from dollar proceeds of European exports to the U.S., which had become the largest consumer market.
As a result, large amounts of U.S. dollar banknotes were in the custody of foreign banks outside the United States. Some foreign countries, including the Soviet Union, also had deposits in U.S. dollars in American banks, evidenced by certificates of deposit. Various narrations are given of the creation of the first eurodollar account, but most trace back to Communist governments keeping dollar deposits abroad.
In one version, the first eurodollar account was created in France in favour of Communist China, which in 1949 managed to move almost all of its U.S. dollar banknotes to the Soviet-owned Banque Commerciale pour l'Europe du Nord – Eurobank (BCEN) in Paris before the United States froze its remaining U.S. situated assets during the Korean War. City of London banks, such as Midland Bank, now part of HSBC, and their offshore holding companies also played a major role in holding the deposits.
In the mid-1950s, Eurodollar trading and its development into a dominant world currency began when the Soviet Union wanted better interest rates on their Eurodollars and convinced an Italian banking cartel to give them more interest than could have been earned if the dollars were deposited in the U.S. The Italian bankers then had to find customers ready to borrow the Soviet dollars and pay above the U.S. legal interest-rate caps for their use, and were able to do so; thus, Eurodollars began to be used increasingly in global finance.
By the end of the 1960s, the eurodollar market was $70 billion.
- Regulation Q, the U.S. Federal Reserve's ceiling on interest payable on domestic deposits during the high inflation of the 1970s
- Eurodollar deposits were a cheaper source of funds because they were free of reserve requirements and deposit insurance assessments
Until the repeal of Regulation Q on 21 July 2011, banks were not allowed to pay interest on corporate transactional accounts. Banks would automatically transfer, or sweep, funds from a corporation's checking account into an overnight investment option such as Eurodollar sweep accounts to effectively earn interest on those funds.
In 2016, the Eurodollar market size was estimated at around 13.833 trillion.
From 2016 to 2024, the use of Eurodollars has consistently declined.
After reserve requirements were eliminated in 2020, U.S. banks began shifting toward selected deposits (domestic, offshore-style instruments) instead of Eurodollars. As of early 2024, selected deposits made up nearly 85% of overnight volume, compared to about 50–50 in 2019. It traded on the Chicago Mercantile Exchange. Eurodollar futures were an instrument used to wager on Federal Reserve policy or to hedge the direction of short-term interest rates. In April 2023, after the Libor scandal, they were eliminated and transitioned to SOFR-based contracts.
See also
- Banking in the United States
- Eurobond
- Petrocurrency
- Swap
- TED spread