Saturday, August 22, 2009

What is a Eurodollar?

Because the dollar is the chief international currency today, the market for Eurodollar dominates the Eurocurrency markets. What are Eurodollars? Eurodollars are deposits of U.S. dollars in banks located outside the United States. The banks in question record the deposits on their books in U.S. dollars, not in the home currency. While the large majority of Eurodollar (and other currency) deposits are held in Europe, these deposits have spread worldwide, and Europe‘s share of the total is actually declining.
Frequently, banks accepting Eurodollar deposits are foreign branches of American banks. For example, in the city of London-the center of the Eurocurrency market today-branches of American banks outnumber British banks and bid aggressively for deposits denominated in U.S. dollars. Many of these funds will then be loaned to the home office in the states to meet reserve requirements and other liquidity needs. The remaining funds will be loaned to private corporations and governments abroad who have need of U.S. dollars.
No one knows exactly how large the Eurodollar market is. One reason is that the market is almost completely unregulated. Moreover, many international banks refuse to disclose publicly their deposit balances in various currencies. Another reasons for the relative lack of information on market activity is that Eurocurrencies are merely bookkeeping entries on a bank ‘S ledger and not really currencies at all. You cannot put Eurodollars in your pocket like bank notes. Moreover, Eurodollar deposits are continually on the move in the form of loans. They are employed to finance the import and export of goods, to supplement government tax revenue, to provide working capital for the foreign operations of U.S. multinational corporations, and, as we noted earlier, to provide liquid reserves to the largest banks headquartered in the United States.
One recent estimate for mid-1980 drawn from figures compiled by Morgan guaranty trust company in New York gave the gross size of the entire Eurocurrency market at $1,470 billion. The term gross in this instance means the sum of all foreign-currency –denominated liabilities outside the country of the currency‘s origin. The net size of the Eurocurrency market, netting out deposits owned by Eurocurrency banks, was estimated at close to $700 billion. Because Eurodollar represent about three quarters of all Eurocurrency liabilities, the gross size of the Eurodollar market would be about $1,100 billion, while the net total is probably close to $500 billion. Figures of this magnitude would make the Eurodollar market the largest of all money markets.

No comments: