Eurodollar

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Blog Author :

Nanditha Saravanakumar

Edited by :

Alfina L.

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Eurodollar Definition

A Eurodollar is a US dollar deposited in a foreign bank account. The term originated with the US dollar-denominated deposits in European banks. Since the currency is being held outside the country, it is not subject to regulations by the US Federal Reserve and the Securities and Exchange Commission.

What is Eurodollar?

The Eurodollar exchange rate and value are the same as the USD. But holding the currency in deposits outside the United States means that the deposits can be subject to the political and economic risks of the country where the bank account is located.

Table of contents
  • Eurodollars refer to the official currency of the United States, the US dollar, that is held in foreign bank deposits.
  • It is the US dollar-denominated time deposits held outside the United States, initially in Europe, and increasingly by Asian and Caribbean countries.
  • The deposits, withdrawals, and transactions from and to this account are conducted in dollars.
  • It is precisely a US dollar held outside the United States territory. It shares all the features of a US dollar; the Eurodollar conversion, too, is similar to the US dollar.

Eurodollar Explained

Eurodollars are just US dollars. It differs from US dollars in that it is held outside the United States and is neither regulated nor supported by the US Federal Reserve. It is also contingent on the risks of the country in which the bank is situated. Nevertheless, most such banks are located in stable and major financial hubs like London, Paris, Luxembourg, etc.

The interest rate on foreign dollar-denominated deposits is usually high due to the lesser regulation and subsequent higher risk. This is probably why the Eurodollar market is a prominent capital market. An important feature is that all deposits are large, ranging from $100,000 to the millions.

Since Eurodollar markets have a large capital volume, it requires funds to flow continuously. High liquidity by regular deposits is what keeps them running. These markets also have a high risk as there is no financial authority like the Federal Reserve to insure them from volatility and market uncertainties. This is why this market provides excellent returns to investors.

With this knowledge, knowing about the Eurodollar futures market is also essential. The futures trading takes place electronically. The Chicago Mercantile Exchange (CME) launched the investment option in 1981. It involves time deposits of $1 million or more with a maturity period of three months.

Foreign companies outside the US territory issue Eurodollar bonds or Eurobonds. The funds so obtained are used by multinational companies for expansion and development. This works similarly to a stock market. However, the capital received by selling Eurobonds is held in institutions outside the US.

History

One can trace the Eurodollar's history to the post—World War II period in Europe when the United States offered money to a financially war-ravaged Europe as part of the Marshall Plan. So naturally, this increased the supply and circulation of USD in Europe.

Another reason for the use of the US dollar in Europe can be attributed to the increased consumerism in the US, where the living conditions of most people are better than in most other countries. Therefore, imports to the US from Europe also led to the acceptance of USD in the continent. However, now, the USD is used in countries outside Europe too.

Example

The Russian finance ministry decided to pay the obligations of two Eurobond issues. Reportedly, one issue will mature in 2027 and the other in 2047. As a result, the finance ministry paid 12.51 billion roubles, or $234.5 million, to the National Settlement Depository (NSD).

The bond-holders whose Eurobonds have Russian ownership will be paid in roubles, whereas for those investors whose bonds are not under the ownership of Russia, the payment will be made to a special rouble account at the NSD. This is because no one can transfer the funds due to the sanctions imposed on the country because of the Russia-Ukraine war.

Frequently Asked Questions (FAQs)

1. What are Eurodollar futures?

Eurodollars usually give high-interest rates on deposits. This, coupled with the size of the deposits, make it an attractive investment option. The Chicago Mercantile Exchange initiated this by accepting deposits with a minimum value of $1 million. Against a maturity period of 3 months and better returns, this has gained prominence.

2. Are Eurodollar bonds registered with the SEC?

Foreign companies issue US dollar-denominated bonds outside the United States. Thus, they are neither registered with the Securities and Exchange Commission nor regulated by the Federal Reserve.

3. What is the difference between a dollar and a Eurodollar?

The Eurodollar is, in fact, the dollar. The difference is that it is used outside the national borders of the U.S. Hence it is not under the jurisdiction of the Federal Reserve or Securities and Exchange Commission. Also, dollar-denominated funds outside the US typically provide higher deposit interest rates.

4. What are Eurodollars used for?

Eurodollar being a currency serves all the purposes of one. It is used in transactions, deposits, drawings, loans, etc. Futures and bonds, too, are provided with the currency. The Eurodollar exchange rate is the same as the dollar.