What is Eurodollar?
A eurodollar is a US dollar deposit held in a bank outside the United States — typically in London, Singapore, the Caribbean, or other offshore financial centers. The eurodollar market is estimated at $13+ trillion in deposits and is the foundation of the global USD shadow banking system. Despite the name, eurodollars have nothing to do with the Euro currency.
Definition
The eurodollar market emerged in the late 1950s when the Soviet Union (concerned about US asset seizure during Cold War tensions) began holding USD deposits in European banks rather than US banks. The market expanded dramatically as multinational corporations, foreign central banks, and offshore investors discovered the regulatory advantages of holding USD outside US jurisdiction. London became the dominant eurodollar center due to favorable UK regulations and timezone advantages. Eurodollars are NOT subject to US Federal Reserve regulations (deposit insurance, reserve requirements, certain reporting) — creating both opportunity (higher yields, lower costs) and risk (no deposit-insurance backstop). The eurodollar interbank rate (LIBOR until 2023, now SOFR) was the global benchmark for trillions of dollars in derivatives and loans. The eurodollar market provides crucial USD liquidity to the global economy beyond what Fed-regulated US banks could supply.
Worked example
A multinational company headquartered in Germany earns USD revenue from US operations. Rather than depositing the USD with a US bank (subject to FDIC insurance, US tax reporting, US Patriot Act compliance), the company deposits the USD in a London-based JP Morgan branch — a eurodollar deposit. The London branch can lend the USD to a Brazilian company needing dollar financing, without the transaction touching the US banking system. The Brazilian company pays interest at SOFR+spread; the German company earns a deposit rate slightly below market. JP Morgan London earns the spread. Total transaction: $50 million in USD flows entirely outside the US, generating profit for all parties, without any US regulatory oversight.
Why it matters
The eurodollar market is the backbone of global USD shadow banking. It provides USD liquidity to the global economy beyond what US-domiciled banks could supply, enables non-US entities to access USD financing without US-banking-system friction, and creates structural USD demand that supports USD's reserve-currency status. For currency markets specifically: eurodollar shortages can drive USD strength (Fed standing FX-swap lines with foreign central banks were created in 2008 specifically to relieve eurodollar stress); eurodollar rate movements (formerly LIBOR, now SOFR) drive global borrowing costs. For consumers, eurodollars are invisible but affect everything from mortgage rates to international trade financing.
Frequently asked questions
Why are eurodollars called "euro" if they're USD?
The "euro" prefix predates the European Union's euro currency by decades. The eurodollar market emerged in the late 1950s in European (particularly London) banks holding USD deposits outside the US — hence "Euro" (European) + "dollar" (USD). When the EU adopted the euro currency in 1999, this created naming confusion that persists. The eurodollar market has nothing to do with the European currency: it's USD deposited in non-US banks. By analogy, "euroyen" (Japanese yen held outside Japan) and "eurobonds" (bonds issued outside the issuer's home jurisdiction) follow the same naming convention.
How big is the eurodollar market?
Estimates vary widely because the market is largely unregulated and opaque. Most credible estimates put eurodollar deposits at $13-15 trillion — larger than the US M2 money supply ($21 trillion includes both US-domiciled and some offshore USD). The eurodollar market is concentrated in London (still the dominant center despite Brexit), Singapore, Hong Kong, the Cayman Islands, and offshore Caribbean banking centers. The 2008 financial crisis revealed significant eurodollar-system stresses — Fed FX-swap lines with major foreign central banks were created specifically to relieve eurodollar liquidity strains.
What happened to LIBOR?
LIBOR (London Interbank Offered Rate) was the eurodollar interbank lending rate that served as the global benchmark for $400+ trillion in derivatives and loans for decades. Following the 2012 LIBOR manipulation scandal (multiple major banks fined billions), LIBOR was officially phased out in 2023. The Fed-led replacement is SOFR (Secured Overnight Financing Rate), based on actual US Treasury repurchase-agreement transactions rather than self-reported bank quotes. Similar national replacements: SONIA (UK), ESTR (Eurozone), TONA (Japan), SARON (Switzerland). The transition was complex but mostly complete by mid-2023.
Related terms
Reserve Currency
A reserve currency is held in significant quantities by central banks and other major financial institutions as part of their foreign-exchange reserves. The US Dollar is the dominant global reserve currency, accounting for approximately 58% of allocated reserves; the Euro is second at ~20%.
Fed Funds Rate
The federal funds rate is the overnight interest rate at which US commercial banks lend reserves to each other. The Federal Open Market Committee (FOMC) sets a target range for this rate eight times per year — its decisions are the single most-watched event in global financial markets.
Foreign Exchange Reserves
Foreign exchange (FX) reserves are foreign currencies and gold held by a central bank to support the domestic currency, defend exchange-rate pegs, intervene in FX markets, and settle international payments. Global FX reserves total approximately $12 trillion as of 2025-2026.