A eurodollar is a U.S. dollar deposited in a bank outside the United States, or in an offshore branch of a U.S. bank. Despite the name, eurodollars have nothing specifically to do with Europe or the euro currency. The term dates back to the post-World War II era when dollar deposits first accumulated in European banks, but today eurodollars exist in banks worldwide, from Tokyo to the Cayman Islands to London.
How Eurodollars Actually Work
When a company, government, or individual deposits U.S. dollars into a bank located outside the United States, those dollars become eurodollars. The money is still denominated in U.S. dollars, not converted to a foreign currency. What makes it a eurodollar is simply the location of the deposit: it sits outside the reach of U.S. domestic banking regulations.
Banks use eurodollars primarily to meet their dollar funding needs. A U.S.-based bank can accept dollar deposits in an offshore branch, typically with an overnight maturity, and then transfer those funds back onshore. Foreign banks with branches in the U.S. are heavy participants too. According to the Federal Reserve Bank of New York, branches and agencies of foreign banks are the main borrowers in the eurodollar market, borrowing between $50 billion and $200 billion on an average day and accounting for over 90 percent of total daily volume since 2016.
The overnight eurodollar market is substantial. Since 2019, daily volume of overnight eurodollar and related deposit transactions has averaged $150 billion, nearly double the $80 billion average in the overnight federal funds market, which is the primary market where U.S. banks lend reserves to each other domestically.
Why the Eurodollar Market Exists
The eurodollar market grew because offshore dollar deposits historically faced lighter regulation than domestic ones. U.S. banking rules impose requirements on deposits held within the country, including reserve requirements (the percentage of deposits a bank must hold rather than lend out) and deposit insurance assessments. Deposits held offshore can sidestep some of these costs.
Reserve requirements on eurodollar-related liabilities have shifted dramatically over the decades. In 1969, the Federal Reserve imposed a 10 percent marginal reserve requirement on banks’ foreign borrowings, primarily eurodollars. That rate climbed to 20 percent by 1971, then gradually fell. By December 1990, the reserve requirement on eurocurrency liabilities dropped to zero, where it remains today. This zero-percent requirement means banks face no mandated reserve cost on these offshore deposits, making eurodollar funding an attractive and efficient source of dollars.
Beyond reserve requirements, eurodollar deposits also fall outside the jurisdiction of the Federal Deposit Insurance Corporation. That means they aren’t covered by FDIC insurance, which is a risk for depositors but a cost savings for banks since they don’t pay insurance premiums on those balances. These combined advantages help explain why the market has remained so large for decades.
Who Uses Eurodollars and Why
Eurodollars serve several overlapping purposes in global finance. Multinational corporations hold dollar deposits overseas to settle international trade and pay suppliers without constantly converting currencies. Foreign governments and central banks hold eurodollar deposits as part of their dollar reserves. And banks around the world use the eurodollar market as a wholesale funding source, borrowing dollars short-term to support lending, trade finance, and other operations.
For foreign banks operating in the U.S., eurodollars are a critical tool. A bank headquartered in Japan or Germany with a branch in New York needs dollars to fund its American lending operations. Rather than raising those dollars exclusively through domestic U.S. channels, it can borrow from its parent bank’s offshore dollar deposits or tap the broader eurodollar interbank market. This is why foreign bank branches dominate the borrowing side of the market.
Eurodollars and Interest Rate Benchmarks
For decades, the eurodollar market was central to setting one of the world’s most important interest rates: LIBOR (the London Interbank Offered Rate). LIBOR was based on the rates at which banks in London said they could borrow dollars from each other, and it served as the reference rate for trillions of dollars in loans, mortgages, and derivatives worldwide.
LIBOR’s demise reshaped this connection. U.S. banking regulators told supervised institutions to stop entering new contracts based on USD LIBOR by December 31, 2021. The final USD LIBOR panel settings ceased on June 30, 2023, ending the benchmark for good. In its place, the Alternative Reference Rates Committee unanimously selected SOFR (Secured Overnight Financing Rate) in 2017 as the recommended replacement. SOFR measures the cost of borrowing cash overnight using U.S. Treasury securities as collateral, making it based on actual transactions in the massive Treasury repo market rather than on bank estimates.
Eurodollar futures, once among the most actively traded contracts in the world, were directly tied to LIBOR. As LIBOR wound down, the CME Group transitioned eurodollar futures to SOFR-based contracts. Traders and institutions that once used eurodollar futures to hedge interest rate risk now largely use SOFR futures instead.
How the Market Has Evolved
The eurodollar market today looks different from even a few years ago. The Federal Reserve Bank of New York tracks what it calls “eurodollars and selected deposits” together as related categories of bank funding. In 2019, eurodollars and selected deposits each accounted for roughly half of their combined overnight volume. By 2022, selected deposits (a broader category that includes certain other offshore and wholesale deposit types) had grown to represent 85 percent of total volume, with traditional eurodollar transactions shrinking as a share.
This shift reflects broader changes in how banks fund themselves. Post-2008 financial reforms pushed banks toward more stable funding sources, and the zero-interest-rate environment of the 2010s reduced the urgency of seeking out the cheapest possible short-term dollars. The transition away from LIBOR also diminished the eurodollar market’s role as a pricing anchor.
Still, the underlying concept remains vital. The U.S. dollar is the dominant currency in global trade and finance, and enormous quantities of dollars circulate outside U.S. borders at all times. Whether those offshore dollars are labeled “eurodollars” or categorized under newer terminology, the basic dynamic persists: banks, corporations, and governments around the world need access to dollars, and the offshore dollar market is how they get it.