Eurodollars
Eurodollars are US dollar deposits held at banks outside the United States, or at overseas branches of US banks. Despite the name they have nothing to do with the euro, and they form a huge offshore dollar funding market.
A dollar deposited in a London or Singapore bank is still a dollar — but it sits outside US banking rules. These offshore dollars, called eurodollars, grew into one of the world's biggest funding markets and gave rise to benchmarks like LIBOR. This entry explains what eurodollars are, why they exist and why they matter for global liquidity.
- Category
- Bonds and Interest Rates
- Reading time
- 3 min
- Also called
- Eurodollar, Eurodollar market, Offshore dollars
- Updated
Eurodollars in plain words
Eurodollars are funds denominated in US dollars and held in foreign banks or overseas branches of American banks.1
LIBOR measured the rate at which major global banks were willing to lend to each other short term, much of it in this offshore market.2
The "euro" prefix refers to the market's European origins, not the euro currency. See Base and Quote Currency.
How the eurodollar market works, step by step
Dollars move offshore
Deposited at a non-US bank.
Banks lend them on
To companies and other banks. See Interbank Market.
Rates are set by markets
Historically linked to LIBOR. See LIBOR.
Lighter regulation
Outside some US rules.
Global trade uses them
Dollars fund cross-border business.
Stress spreads quickly
Dollar shortages hit the world. See Liquidity.
Worked examples
Example 1 — An offshore deposit
Eurodollar depositA Japanese exporter keeps $10m at a bank in London.
| Currency | US dollars |
| Location | Outside the US |
Dollar funds held in foreign banks are eurodollars.1
Example 2 — Interest earned
$250,000The deposit earns 5% for 6 months.
| Interest | $10m × 5% × 0.5 = $250,000 |
Eurodollar deposits pay market rates set in the offshore funding market. See Interest Rate.
Example 3 — Dollar squeeze
Funding stressIn a crisis, offshore banks scramble for dollars and funding costs jump 2 points.
| Extra cost on $100m | $2m a year |
Because so much global funding is in offshore dollars, shortages spread worldwide. See Credit Crunch.
Eurodollars vs domestic dollars
| Aspect | Eurodollars | US deposits |
|---|---|---|
| Location | Outside the US | US banks |
| Regulation | Lighter, foreign rules | US rules |
| Insurance | Usually none | FDIC up to limits |
| Benchmark history | LIBOR | Fed funds |
Why eurodollars matter
Global funding
Dollar loans worldwide. See Reserve Currency.
Rate benchmarks
The basis for LIBOR. See LIBOR.
Crisis signals
Funding stress indicators. See TED Spread.
Central bank swap lines
Fed supplies dollars abroad in stress. See Currency and FX Swaps.
Advantages and disadvantages
Advantages
- Deep global dollar funding.
- Competitive rates.
- Supports international trade.
Disadvantages
- Less regulated.
- Vulnerable to dollar shortages.
- Hard to measure fully.
Going deeper
Read as far as you need. Each level builds on the one before it.
Not the euro
Beginner
Eurodollars are US dollars, held in foreign banks or overseas branches of US banks.1
LIBOR connection
Intermediate
LIBOR reflected interbank lending rates among major global banks and became the market's key benchmark before being phased out.2
Global dollar system
Advanced
Because many non-US firms borrow in dollars, offshore dollar shortages can tighten financial conditions worldwide. See US Dollar Index.
Common mistakes
Confusing it with the euro
It's US dollars.
Assuming deposit insurance
Offshore deposits usually aren't insured.
Ignoring dollar funding stress
It drives global markets.
Mixing with Eurobonds
Different instruments. See Eurobond.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Eurodollars are US dollars held outside the US.
- They have nothing to do with the euro.
- They form a huge global funding market.
- LIBOR grew out of this market.
- Dollar shortages there affect the world.
Frequently asked questions
Why are they called eurodollars?
Are eurodollar deposits safe?
What were eurodollar futures?
Further learning
- LIBOR
The market's benchmark.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Eurodollar (opens in a new tab) Checked .
- Corporate Finance Institute. LIBOR: Why It Was Phased Out and What Replaced It (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.