Eurodollar

What Is a Eurodollar?

A Eurodollar is a deposit denominated in U.S. dollars that is held in a bank located outside the United States. Despite the name, the bank does not have to be in Europe, and the currency remains the dollar. Eurodollar deposits are often time deposits with fixed maturities, and banks, corporations, and large institutions use them for short-term lending and borrowing.

How It Works

Because these deposits sit outside the U.S. banking system, they may not be subject to the same reserve requirements or deposit insurance coverage that apply to dollar deposits held in American banks. This difference in regulation is one reason the market developed as a separate pool of dollar funding. Banks that take in Eurodollar deposits can lend those dollars to borrowers around the world, and the interest rates on these deposits and loans are shaped by global demand and supply for dollars, not only by conditions inside the United States.

Benchmark Rates and Futures

For many years, Eurodollar rates served as a reference point for short-term borrowing costs in international markets. The London Interbank Offered Rate (LIBOR) was one of the best-known benchmarks tied to dollar deposits of this kind. Eurodollar futures, which were exchange-traded futures contracts based on the interest rate on three-month Eurodollar deposits, were widely used by market participants to hedge or speculate on short-term rate movements.

As LIBOR was phased out, much of this activity shifted to other benchmarks, including the Secured Overnight Financing Rate (SOFR), which is based on overnight Treasury repurchase agreements. As a result, the term is now mostly of historical interest, though the underlying idea of dollar deposits held offshore remains part of the global financial system.

Why It Matters

For investors, Eurodollar markets are part of the broader system that determines how much dollar funding costs outside the United States. Changes in these rates can affect the borrowing costs of companies, banks, and governments that rely on dollar financing abroad. The term also illustrates that the U.S. dollar plays a major international role that extends well beyond domestic American banks and regulation.