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What are Eurodollars? How are they distinct from plain old dollars? Asking as an interested but non-specialist outsider, though I do know what demand deposits are and am familiar with the conversation regarding fractional reserve banking.

ianb
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1 Answers1

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The definition of Eurodollar is (see Investopedia):

The term eurodollar refers to U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks.

They are distinct from regular dollars because they are not held within the US, and as a consequence eurodollars are generally not subject to regulations by the Fed (e.g. reserve requirements) and other US banking regulations (like the federal deposit insurance). Since historically in the past most of the dollar denominated deposits were held in Europe (this was to considerable extent due to the Marshall plan which led to relatively high circulation of dollars in the Europe) they became known as "eurodollars."

If you want to learn more about history of eurodollars and the mechanisms behind them then you can have look at Schenk(1998): The origins of the Eurodollar market in London, or Einzig & Quinn (1964): The Euro-dollar system: practice and theory of international interest rates.

1muflon1
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    A few additional notes: (1) In addition to not being regulated by the Fed, Eurodollars don’t have a direct liquidity backstop from it, which can matter during stress periods; (2) In interest rates, “Eurodollars” (e.g. “Eurodollar futures”) refers specifically to USD Libor contracts, which are priced in London and thus reflect the cost of funding in Eurodollars; (3) The “Euro-“ stem has also evolved (out of the same etymology described in the answer above) to be applied to other currencies outside their home currency areas, such as “Euroyen” or even “Euroeuros.” – dismalscience Oct 02 '20 at 00:04
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    So in a fractional reserve system, in the US, when a borrower gets a loan for 100USD then 100USD of demand deposits are created out of nothing - then later when the borrower repays, that 100USD is extinguished. Is it exacly the same arrangement with eurodollars outside the US? I.e. creation out of nothing and later extinguishing? – Mick Oct 02 '20 at 09:25
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    @Mick eurodollars are just dollars that were moved from US to some other jurisdiction so they are created in the same way. They are not being directly created by foreign banks as those do not have access to Fed reserves and Fed liquidity. That is also why they pay risk premium over US deposit accounts. – csilvia Oct 02 '20 at 13:17
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    With regard moving dollars... To move X dollars in demand deposits from a US bank A to a US bank B, bank A has to transfer X dollars of reserves (hald at the US central bank) to bank B. How do dollars get "moved" to a foreign bank (C) that is offering eurodollar accounts? – Mick Oct 02 '20 at 13:37