The Eurodollar market refers to US dollar deposits held at banks located outside the United States — originally in Europe, hence the name, though today the market spans London, the Cayman Islands, Singapore, Hong Kong, the Bahamas, and other financial centers. The "Euro-" prefix is geographic, not related to the euro currency, and the same logic produces Euroyen, Eurosterling, and other Eurocurrencies.
The market emerged in the late 1950s. Two commonly cited drivers are the desire of the Soviet Union and Eastern Bloc states to hold dollars outside US jurisdiction during the Cold War (to avoid potential asset freezes), and the constraints imposed by US domestic banking rules — particularly Regulation Q, which capped interest rates payable on US-based deposits. London banks, free of these caps and of US reserve requirements, could offer more competitive rates on dollar deposits and lend those dollars more cheaply.
Key features:
- Wholesale and interbank: transactions are typically large (often $1 million or more) and conducted between banks, corporations, and sovereigns rather than retail customers.
- Lightly regulated: Eurodollar deposits historically faced no US reserve requirements, no FDIC insurance, and no interest-rate ceilings.
- Reference rate: for decades, the London Interbank Offered Rate (LIBOR) was the benchmark for Eurodollar lending. Following manipulation scandals, LIBOR was phased out, with USD LIBOR ceasing publication in mid-2023 and being replaced largely by the Secured Overnight Financing Rate (SOFR).
- Eurodollar futures: the CME launched Eurodollar futures in 1981; they became one of the most heavily traded interest-rate contracts globally before transitioning to SOFR futures.
For political researchers, the Eurodollar market matters because it underpins the global reach of the dollar, complicates US monetary policy transmission, and shapes debates about exorbitant privilege, capital mobility, sanctions enforcement, and the architecture of offshore finance.
Example
In 2022, after the US and EU froze Russian central bank reserves following the invasion of Ukraine, analysts revisited the Cold War origins of the Eurodollar market — when Soviet banks first parked dollars in London to escape US jurisdiction.
Frequently asked questions
No. The name predates the euro by decades. 'Euro-' here means offshore — any US dollar deposit held at a bank outside the United States, whether in London, Singapore, or the Caribbean.
Keep learning