Defining and analysing Eurodollars
Eurodollars are U.S. Dollars that are deposited in banks outside the United States’ financial system.
The concept of Eurodollars isn’t confined to a specific geographic location; it encompasses U.S. Dollars held by foreign banks or by American banks operating abroad.
These Eurodollars can be found in any country and are held by financial institutions that are not part of the U.S. banking system.
The Eurodollar market came into existence following World War II and the implementation of the Marshall Plan. As European nations like Germany, France, Belgium, and the United Kingdom began to rebuild and grow their economies, they increasingly traded in U.S. Dollars, primarily for infrastructure development.
Many of these countries opted to keep their U.S. Dollar reserves offshore rather than funneling them back through the U.S. financial system, with London-based banks often being the preferred repositories.
Over time, a robust lending market developed around these offshore U.S. Dollar deposits. The benchmark interest rate for this market became known as the London Interbank Offered Rate (LIBOR).