The Eurodollar

Eurodollars are unsecured, dollar-denominated accounts at foreign banks or foreign branches of American banks.  Because these ‘eurodollar’ accounts are held outside the United States, eurodollars are not subject to the same regulatory regimes as those in the US, namely the requirements for loss reserves to be held.  Historically, these US dollar denominated deposits were held almost exclusively in Europe, hence the name, they can be held anywhere outside of the US.  So while held in say the Bahamas or the Cayman Islands, they are technically considered eurodollar accounts.

Eurodollar accounts can offer higher interest rates than their domestic banks. Free of regulations and related costs, eurodollars held in foreign countries can be invested differently than if those same dollars were held in the US and subject to US regulations and fees.  While the underlying currency of US dollar is relatively stable, the eurodollar is operating in countries without the US protections and safeguards (those same safeguards that make it more expensive to operate), and therefore these offshore locations make the eurodollar subject to political and economic risk of the country in which it is held.

In conclusion, eurodollars have nothing to do with the European Union or EU currency. Rather, they are US dollar denominated deposits in overseas banks. In other words, they are US dollars that are not subject to the regulations of US banks.  Moreover, eurodollars are frequently used by US companies and US banks to earn higher rates of return than if the US dollars were to be invested in the US, all while avoiding currency exchange rate risks.