Eurodollars are U.S.-dollar denominated deposits held at banks outside of the United States, including branches of U.S. banks located outside of the U.S. This market began in Europe (primarily in London) after World War II, hence the name. Eurodollars can be held anywhere outside the United States however.
Eurodollars escape regulation by the Federal Reserve Board, including reserve requirements. They are widely held in bank branches located in the Bahamas and the Cayman Islands.
The fact that these dollar-denominated deposits are held offshore and not subject to U.S. banking regulations allow these institutions to pay slightly higher rates than depositors might receive here in the U.S. Money market funds, foreign central banks and large corporations are among the more active players in this market.
The Eurodollar market is one of the world’s major international capital markets. Major corporations use the Eurodollar market to settle international transactions, to finance import and export activity, to make short-term loans and as a place to invest excess cash.
The Eurodollar market is an alternative that many U.S. corporations use to raise money when conditions are unfavorable in the domestic U.S. market.
The Eurodollar market has evolved to include the ability for U.S. companies to offer a portion of the shares under an IPO for trading in European markets. Eurodollar bonds pay investors interest in dollars but issuers do not have to comply with the same SEC rules as domestic issuers.