The Functions of Eurobonds and Eurodollars

A Eurodollar is a U.S. dollar deposited in a banking office outside the United States, (Funding global finance, 199). A Eurodollar is basically a product on the wholesale market of bank funds. "The bank does not have to be a foreign bank; it may be a an overseas branch of a U.S. bank." (Funding global finance, 199). There are several fundamental differences between a U.S. dollar and a Eurodollar.

All Eurodollar deposits are for a fixed term, anywhere from one day to as long as five years. This is the same situation as with foreign exchange rate transactions on the spot market. The domestic dollar, on the other hand, functions with demand accounts. In other words, they are highly liquid and are easily transacted. All Eurodollar deposits earn varying interest rates depending on the popularity and the supply and demand for any given maturity. At a given time, for instance, a five-year maturity might be more popular than a one-year. Eurodollars, on the other hand, are free from any reserve requirements which restrict US banks liquidity on US dollar deposits so the entire amount of a Eurodollar deposit is free for transaction and investment involvement.

Robert Mundell, writing in the Wall Street Journal, suggests that the introduction of the euro represent "the most dramatic change in the international monetary system since President Nixon took the dollar off gold in 1971. When the d