Offshore Dollars: The Eurodollar Market

A eurodollar is simply a US dollar deposited in a bank outside the United States. Despite the name, it has nothing to do with the euro currency, and the bank could be in London, Singapore or Dubai.

How it began

In the 1950s and 1960s, dollars began piling up in banks in London and elsewhere in Europe:

• The Soviet Union and others kept dollars outside the US to avoid possible US seizure.
• US banking rules, such as limits on interest rates paid on deposits, encouraged dollars to move offshore where rules were lighter.
• Trade and investment created large dollar flows outside the US.

London became the centre of this market.

Why it grew

• Lighter regulation than in the US.
• Higher interest rates for depositors and cheaper loans for borrowers.
• Global trade in dollars.

Today, trillions of dollars of loans, deposits and bonds exist outside the United States. Banks and companies worldwide borrow in dollars even when they are not American.

Why it matters

• Dollar funding: many non-US banks rely on borrowing dollars to fund dollar loans. They need access to dollar funding markets.
• Crisis risk: in 2008, and again in March 2020, dollar funding markets froze. Non-US banks struggled to get dollars, creating a global scramble. The US Federal Reserve responded with swap lines to other central banks.
• Fed influence: US interest rate changes affect dollar borrowing costs worldwide.

LIBOR

The London Interbank Offered Rate, or LIBOR, was the benchmark interest rate for dollar lending between banks in London, used for trillions of dollars of loans and derivatives. After a manipulation scandal around 2012, LIBOR was phased out and replaced by alternative rates, such as SOFR in the US, by 2023.