Currency Gambling for Forex

Forex: The Eurodollar Market

The borderlines between national currencies matched the geographic borders of nations. Ever since the late 1950s there has been an increasing tendency to for non-U.S. banks to be willing to owe deposits, denominated in U.S. dollars. This has given rise to the term Eurodollar, which means any liquid (money) dollar liability of a party outside the United States.

Eurodollars can be created as follows: suppose that a bank in London acquires dollar deposits on a New York bank because of U.S. purchases of imports from Britain. If the London bank simply holds onto these deposits, no Eurodollars are produced. But if it is willing to lend them to somebody else at interest, producing dollar deposit claims against itself, these claims are Eurodollars.

They must be repaid with interest in dollars, of course; but as long as they are outstanding dollar deposit claims against a non-U.S. bank, they too, are called Eurodollars. London banks even have some limited capacity to create more Eurodollar claims against themselves than the amount of their own dollar deposits in New York.

A major factor which gave rise to the Eurodollar market was Regulation Q of the Federal Reserve System, which fixed the rates of interest, paid on time deposits but did not apply to time deposits owned by foreign accounts. Competition among New York banks led returns on such deposits in 1958 and 1959 to rise one-fourth of 1 percent above the Regulation Q ceilings. This induced banks in London to bid for dollar deposits, which they conceded to New York. Moreover, some depositors, such as the official agencies of the Soviet Union, found it convenient to hold their dollar accounts in Europe, specifically in London, out of the jurisdiction of the U.S. authorities.

European lenders and borrowers in dollars also found it convenient to trade in dollars in London, rather than New York, because of the identity of the time zones, without the need to limit trading to the few hours a day when Europe and U.S. banks were open simultaneously.

Through the 1960s, the Eurodollar market grew rapidly. Currencies other than dollars were traded outside their domestic markets. London is the major location that time; and depositors consist mainly of Europe central banks, firms, and individuals in the United States and in third world countries. In the 1970s, the practice of accepting deposits in U.S. dollars and other non-local currencies spread to banks in Singapore and Hong Kong. The link between a nation's international transactions and the use of its national currency in world finance has become progressively weaker.

The Eurodollar has grown since the 1950s under various influences. Although there was some debate whether the Eurodollar system can produce and thus add to the world supply of dollars, the majority position is that it can, to a slight, in the right Eurodollar market.


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