Eurodollars have little to do with the official currency of the European Union, the euro (EUR). In 1999, the euro was implemented as the official currency of the European Union as a means to further integrate the economies of that region. Most of the member states of the European Union have dropped their former domestic currencies completely, and all the major banking institutions in Europe now deal with euros in their transactions and operations.

Eurodollars, though, are not found only in Europe. Eurodollars refer to American dollar-denominated money market deposits found in any bank not located in the U.S.;Eurocurrency is any currency deposited in a bank that is not located in the home country where the currency was issued.

The origins of the name "eurocurrency" stem from 1950s. The Soviet Union's currency, the ruble, was considered to be a soft currency. Furthermore, it was extremely difficult, and perhaps even impossible, to exchange rubles for hard currency because the Cold War had caused many countries to avoid the Soviet Union. As a result, the Soviet Union sold commodities in order to receive U.S. dollars. Those dollars could not be deposited into conventional American banks, because it was likely that the U.S. government would freeze those accounts in the event of a confrontation between the two superpowers. In the end, the dollars were deposited in a European bank that had a telex address code called "euro-bank". These deposits would be the start of the eurocurrency market.

To learn more about the money market, see Getting To Know The Money Market and The Money Market: A Look Back.





comments powered by Disqus
Trading Center