Legal Definitions - Eurodollar

A Eurodollar refers to United States currency (U.S. dollars) that is deposited in banks located outside the United States. While the name suggests Europe, these dollar deposits can be held in financial institutions anywhere in the world outside of the U.S. banking system. These funds are frequently used to facilitate international lending, trade, and other financial transactions.

Here are some examples to illustrate the concept of a Eurodollar:

• International Corporate Loan: Imagine a large German automobile manufacturer needs to borrow a significant amount of money in U.S. dollars to fund the expansion of its factory in Mexico. Instead of borrowing from a bank in New York, the manufacturer secures a loan from a major bank in London. The U.S. dollars that the London bank holds and lends out for this purpose are considered Eurodollars, as they are U.S. currency held and transacted outside the U.S. banking system.

• Global Trade Settlement: A Japanese electronics company purchases a large shipment of microchips from a supplier based in Taiwan. Both companies agree to settle the transaction in U.S. dollars. The Japanese company transfers U.S. dollars from its account at a bank in Singapore to the Taiwanese supplier's account at a bank in Hong Kong. The U.S. dollars held by these banks outside of the United States, used to facilitate this international trade, are Eurodollars.

• Foreign Investment by a Sovereign Fund: A sovereign wealth fund in the Middle East decides to diversify its portfolio by investing in U.S.-dollar denominated assets. However, for strategic reasons, it prefers to keep its cash reserves outside the direct jurisdiction of the U.S. financial system. The fund deposits a substantial sum of U.S. dollars into an account at a prominent Swiss bank. These U.S. dollar deposits, held by the Swiss bank, are classified as Eurodollars, as they are U.S. currency held in a non-U.S. bank.