Eurodollar
A Eurodollar is a US dollar deposit held at a bank outside the United States, or at an offshore unit of a US bank. Eurodollars are created by bank lending abroad and sit largely beyond US banking regulation; they have nothing to do with the euro.
Also called: Eurodollars · offshore dollar · offshore dollars · Eurodollar market · eurocurrency
The market began in London in the 1950s, when dollars held in European banks started to be lent on rather than sent home. It grew because offshore deposits escaped US interest-rate ceilings and reserve requirements, so banks could pay more to depositors and charge less to borrowers.
A Eurodollar is a bank's promise to pay dollars. When a bank in London, Singapore or the Cayman Islands lends dollars, it creates a new dollar deposit just as a domestic bank would, without the Federal Reserve creating anything. The result is a pool of dollar credit outside the United States that runs to many trillions. Final settlement still passes through accounts at US correspondent banks, which is the point at which US jurisdiction attaches.
The system's weakness is that offshore banks have dollar liabilities but no direct access to the dollar's lender of last resort. When funding dries up, the shortage appears abroad first, in the price of FX swaps and in demand for central bank swap lines. Dollar stablecoins are often described as a new form of offshore dollar for the same reason: private dollar claims issued outside the US banking perimeter.
In practice
Offshore does not mean out of reach. Dollar payments that clear through the United States are subject to US sanctions and anti-money-laundering law wherever the deposit is booked.
Commonly confused with
| Term | How it differs |
|---|---|
| Euro | The 'Euro' prefix predates the single currency and means 'held outside the home country'. A Eurodollar is a dollar, not a euro, and can be held in Asia or the Caribbean. |
See also
- FX SwapAn FX swap is a contract in which two parties exchange two currencies today and agree to reverse the exchange on a set future date at a rate fixed now. In economic terms it is a loan of one currency secured by another.
- Central Bank Swap LineA central bank swap line is a standing agreement under which one central bank lends its currency to another in exchange for the borrower's currency, so the borrower can supply foreign-currency funding to banks in its own jurisdiction.
- Reserve CurrencyA reserve currency is a currency that central banks hold in large amounts as part of their foreign exchange reserves and that is widely used to price trade, issue debt and settle international payments. The US dollar is the dominant one.
- Commercial Bank MoneyCommercial bank money is the money that exists as deposits at commercial banks. It is a private bank's promise to pay, created when banks lend, and makes up the large majority of the money that households and businesses actually use.
- Correspondent BankingCorrespondent banking is an arrangement in which one bank holds deposits for another bank and makes and receives payments on its behalf, normally so the second bank can reach a currency or a market where it has no branch or license of its own.
- StablecoinA stablecoin is a crypto-asset designed to hold a steady value against a reference, almost always a fiat currency such as the US dollar. How that steadiness is supported differs sharply from one issuer to the next, and so does what a holder can actually redeem.