Eurodollars
A eurodollar is a US dollar deposit held at a bank outside the United States, part of an offshore market that handles much of the world's dollar lending.
Eurodollars are US dollars deposited at banks that are not in the United States. The bank might be in London, Singapore, or the Cayman Islands. No American regulator oversees these deposits, and despite the name, they are unrelated to the European single currency, which came along four decades later.
The eurodollar market is one of the largest credit markets in the world. By the end of 2025, the Bank for International Settlements counted about $14 trillion in dollar credit to non-bank borrowers outside the United States. Much of the world's dollar lending now happens offshore, beyond the direct authority of the Federal Reserve. Nobody planned this system. It grew out of Cold War politics, American banking regulations, and the choices of a few governments acting in their own interest.
How the offshore dollar market started
In the late 1940s, Moscow and Beijing earned dollars from trade but had a problem. Dollar deposits at American banks could be seized by the US government at any moment. After the communist revolution in China in 1949, Beijing moved most of its dollar holdings to the Banque Commerciale pour l'Europe du Nord, a Soviet-controlled bank based in Paris, before Washington froze Chinese assets during the Korean War. Other communist states followed. Traders took the bank's telex code, "Eurobank," and started calling these offshore dollar deposits eurodollars.
American regulations then drove more dollars overseas. Regulation Q limited what domestic banks could offer depositors in interest. A London branch of the same American bank, free from the cap, could pay a better rate on the same dollars. Offshore deposits also fell outside the Federal Reserve's reserve requirements, so banks could lend them out more freely.
In 1963, President Kennedy introduced the Interest Equalization Tax to discourage capital from flowing overseas. The tax raised the cost of borrowing in New York for non-Americans, so they turned to London. Britain declined to regulate the dollar business that foreign banks conducted on its soil, and the City of London became the hub of offshore dollar lending. Every American rule designed to keep dollars at home ended up sending more of them overseas.
How the eurodollar market kept growing
In the 1970s, oil-producing countries in the Persian Gulf accumulated huge dollar surpluses from rising oil prices. Much of that petrodollar revenue entered the offshore market, where banks lent it on to developing countries. That lending financed the heavy borrowing that ended in Latin America's debt crisis in the 1980s, when Mexico, Brazil, and Argentina defaulted or came close. The crisis proved that offshore dollar lending could destabilize whole regions, but the market kept growing.
The offshore system has a built-in vulnerability. A London bank carrying dollar obligations has nowhere to turn for emergency dollars, because only the Federal Reserve can create them. The Bank of England cannot help on its own. In a panic, every institution in the market is chasing the same scarce dollars at the same time.
That vulnerability was exposed twice in the twenty-first century. In 2008, during the global financial crisis, foreign banks could not get the dollars they needed. The Federal Reserve responded with emergency swap agreements, lending dollars to foreign central banks so they could pass them on to their own institutions. Outstanding swaps peaked at $583 billion in December 2008. In March 2020, when the Covid-19 pandemic froze credit markets, the same dollar shortage appeared. The Fed revived its swap program, which peaked at $449 billion.
The Federal Reserve had become the world's dollar lender of last resort. It answers to the US Congress, but its decisions about dollar supply now function as monetary policy for countries that have no vote in those decisions.
Why is it called a eurodollar?
The name traces back to the 1950s and to one bank: the Banque Commerciale pour l'Europe du Nord, a Soviet-controlled institution in Paris that used "Eurobank" as its telex code. Traders picked up the prefix and applied it to all offshore dollar deposits. The word is unrelated to the European single currency, which did not exist until 1999. Today the term covers any US dollar deposit at a bank abroad, whether in London, Tokyo, or the Cayman Islands.
The eurodollar system and dollar dominance
Emerging-market trade, commodity contracts, and corporate debt all depend on offshore dollars. A government in Asia or Latin America can see its financial system shaken by Federal Reserve decisions, because its banks and companies borrow in a currency they cannot create.
What is often called dollar dominance comes less from American exports or central bank reserves than from this offshore lending system. Much private-sector borrowing worldwide is priced in a currency that only one country creates. Countries frustrated by US sanctions can price their trade in yuan, rubles, or rupees, and more are doing so. But pricing trade differently is not the same as building a deep, liquid funding market that the rest of the world trusts enough to borrow in. An Orbis blog article explains why de-dollarization is harder than it sounds.
The eurodollar system began with Moscow placing its dollars where Washington could not seize them. Seven decades later, most of the world's financial system depends on Washington's willingness to supply dollars in a crisis.