Friday, August 21, 2009

The supply of Eurodollars

Where does Eurodollar come from? A major factor in market‘s growth has been the enormous balance-of-payments deficits which the United States has run since the late 1950s. American firms building factories and purchasing goods and services abroad have transferred ownership of dollar deposits to foreign companies, banks, and governments. Domestic shortages of oil and natural gas have forced the United States to import from a third to 40 percent of its petroleum needs generating an enormous outflow of dollars to oil-producing nations. The OPEC countries, for example, accept dollars in payment for crude oil and use the dollar as standard for valuing the oil they sell. American tourists visiting Europe, Japan, Singapore, and the middle East frequently use dollar-denominated traveler‘s checks or take U.s. currency with them and convert it into local currency overseas. Dollar loans made by U.S. Corporation and foreign-based firms have added to the vast Eurodollar pool. Many of these dollar deposits have gravitated to foreign central banks, such as the bank of England and the Bundesbank in the Federal Republic of Germany, as these institutions have attempted to support the dollar and their own currencies in international markets.

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