Eurodollar
A US dollar deposit held at a bank outside United States jurisdiction — dollars created offshore, beyond the Federal Reserve's direct reach.
Also called: offshore dollars, eurodollar system.
The name is a historical accident: the market began with dollar deposits in European banks and has nothing to do with the euro. A dollar deposit in Tokyo or Singapore is a eurodollar too.
A bank outside the US can create dollar deposits by lending dollars, exactly as a US bank does — but it cannot create the reserves that ultimately settle those claims. When offshore dollar funding dries up, there is no domestic lender of last resort standing behind it.
This is why Fed swap lines exist. They are the mechanism by which the Fed lends dollars to other central banks so they can relieve stress in a dollar system that operates outside its borders.
The mechanics
- Where the deposit sits
- A bank outside US jurisdiction, denominated in USD.
- What it lacks
- Direct access to Fed reserves, deposit insurance, and the discount window.
- Stress signal
- Cross-currency basis swaps moving sharply negative against the dollar.
The common misreading
That the dollar system is contained within the United States. Most dollar credit is created outside it, which is why a US central bank ends up acting as the world's.
Related terms
- Central bank liquidity swap lineAn arrangement under which the Federal Reserve lends dollars to another central bank against its currency, so that bank can relieve dollar funding stress among its own banks.
- Repurchase agreementThe sale of a security combined with an agreement to buy it back at a set price and date — legally a sale, economically a loan secured by collateral.
- Euro Short-Term RateThe ECB's benchmark for unsecured overnight borrowing costs of euro-area banks, computed from reported money market transactions and the replacement for EONIA.
Primary sources
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