Word of the Day: Eurodollar

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Word of the Day: Eurodollar

Monday, August 31st, 2009 | Economics, Word of the Day |

Eurodollars are deposits denominated in US dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the United States, allowing for higher margins. There is nothing “European” about Eurodollar deposits; a US dollar-denominated deposit in Tokyo or Caracas would likewise be deemed a Eurodollar deposit. Neither is there any connection with the euro currency. Typically the term is only used for US dollars in European banks, but technically the term could be used for US dollars deposited at any non-US bank account.

More generally, the “euro” prefix can be used to indicate any currency held in a country where it is not the official currency: for example, euroyen or even euroeuro.^[1]

History

Gradually, after the Second World War, the quantity of U.S. dollars outside the United States increased enormously, as a result of both the Marshall Plan and imports into the U.S., which had become the largest consumer market after World War II.

As a result, enormous sums of U.S. dollars 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, granted by certificates.

During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On February 28, 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed “Eurbank dollars” after the bank’s telex address, they eventually became known as “eurodollars”^[2] as such deposits were at first held mostly by European banks and financial institutions.^[2]