What Is the Eurodollar?

The term "eurodollar" refers to unsecured U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks. Because they are held outside the United States, eurodollars are not subject to regulation by the Federal Reserve Board, including its regulation relating to reserve requirements.

Dollar-denominated deposits not subject to U.S. banking regulations originally were held almost exclusively in Europe (resulting in the name eurodollar). But they can be held anywhere outside of the U.S. Branches located in the Bahamas and the Cayman Islands hold large amounts of such d🍬eposits.

Understanding the Eurodollar

The fact that the eurodollar market is relatively free of regulation and its associated costs means such deposits ꦐcan pay higher interest. The lack of such protections also contributes to high🐓er rates, as compensation for greater potential risk.

Their offshore locations make eurodollars subject to political and economic risk in the country of their domicile; however, most branches where the deposits are housed are in very st🔥able l꧂ocations.

Importance as a Capital Market

The eurodollar market is one of the world's primary international 澳洲幸运5官方开奖结果体彩网:capital markets. It is an attractive source of short-term, unsecured funding for corporations and financial institutions. Borrowing costs associated with eurodollar loans can be cheaper than for loans made elsewhere.

Eurodollar funds can also be used for hedging purposes by companies that have exposure to foreign exchange risks.

The eurodollar market requires a steady supply of depositors putting their money into foreign banks. These eurodollar banks may have problems with their liquidity if the supply of deposits drops. 🍃

Liquidity

Eurodollar deposits are quite large; they are made by professional counterparties for a minimum of $100,000 and generally for more than $5 million. It is not uncommon for a bank to accept a single deposit of $500 million or mo🦹re in the overn🍒ight market.

According to the Federal Reserve Bank of New York, from 2019 through 2024 the average daily volume of overnight eurodollar transactions, along with selected deposit transactions, has been $150 billion.

Most transactions in💯 the eurodollar market are overnight, which means they mature on t꧂he next business day. With weekends and holidays, an overnight transaction can take as long as four days.

The transactions usually start on the same day they are executed, with money paid between banks via the Fedwire and 澳洲幸运5官方开奖结果体彩网:CHIPS systems. 𒅌Eurodollar transactions with maturities greater than six months are usually represented by certificates of deposit (CDs), for which there i✱s also a limited secondary market.

Example of Eurodollars

If a company in the U.S. has cash that it doesn't need to use immediately, it might deposit it in a bank anywhere outside of the U.S. That deposit is made in dollars and remains dollar-denominated.

And because the interest rate associated with eurodollars can be higher than the rates it might find at a financial institution in the U.S., the U.S. company can earn ༒earn a greater return on its deposit.

Many American banks have offshore branches, usually in the 𝄹Caribbean, through which they accept eurodollar deposits. European banks are also active in the market.

The transactions for Caribbean branches of U.S. banks are generally executed by trad🧜ers physically situated in U.S. dealing room🌞s, and the money is on loan to fund domestic and international operations.

History of the Eurodollar

The eurodollar market dates back to the period after World War II. Much of Europe had been devastated by the war, and the U.S. provided funds via the 澳洲幸运5官方开奖结果体彩网:Marshall Plan to rebuild the continent.

This lওed to the wide circulation of U.S. dol🦋lars overseas, and the development of a separate, less regulated market for the deposit of those funds.

As mentioned, unlike domestic U.S. deposits, the funds are not subject to the Federal Reserve Bank's reserve requirements. They are also not covered by 澳洲幸运5官方开奖结果体彩网:FDIC insurance. This results in higher interest rates for eurodo𓄧llars.

The Bottom Line

Despite the name, eurodollars have nothing to do with the European Union or the euro currency. Instead, the name simply refers to dollar-denominated deposits at overseas banks. These deposits can benefit from higher interest rates than they would get at domestic banks, but they also face greater risk.