Eurocurrency
Eurocurrency is any currency deposit held at a bank outside the country that issues that currency. For example, U.S. dollars deposited in a British bank or British pounds held in a U.S. bank are both eurocurrency. The term does not imply a European currency or location—what matters is that the deposit is outside the issuing currency’s home market.
How it works
- Banks, corporations, and governments keep deposits in foreign currencies at institutions located outside the currency’s home country.
- These deposits form the basis for a market in which banks lend, borrow, and exchange foreign-currency funds with one another.
- Eurocurrency markets are typically used for short-term funding (e.g., time deposits, interbank loans) and often operate with fewer domestic regulatory constraints than onshore markets.
Why eurocurrency exists
- Globalization: Cross-border trade, investment, and multinational operations create demand for foreign currencies in many jurisdictions, so organizations hold and transact in those currencies abroad.
- Regulatory and operational efficiency: Borrowing or obtaining short-term funds in the eurocurrency market can be faster, cheaper, or less regulated than raising the same funds in the currency’s home market.
Example: Eurodollars
- The most prominent eurocurrency is the eurodollar—U.S. dollar deposits held at banks outside the United States.
- Because the U.S. dollar is the world’s primary reserve and invoicing currency, many firms and banks worldwide rely on eurodollar markets for short-term dollar funding.
- Estimates of the eurodollar market’s size vary and are difficult to measure precisely; some estimates place it in the trillions of dollars.
Implications
- Eurocurrency markets add global liquidity and flexibility for banks, governments, and corporations managing foreign-currency needs.
- They influence short-term interest rates and international bank funding conditions.
- Because they often sit outside domestic regulatory regimes, they can create both efficiency gains and potential cross-border regulatory challenges.
Key takeaways
- Eurocurrency = currency deposits held outside the currency’s home market.
- It need not involve European currencies or Europe itself.
- Eurodollars (U.S. dollars held abroad) are the best-known example and a major source of short-term dollar funding globally.
- Eurocurrency markets play a significant role in international finance by providing liquidity and alternative funding channels.