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Forex: Discrepancies in the Eurodollar Market
There has been a shortage of money market instruments in Europe. The relatively high interest rates and convenient maturities that frequently characterize Eurodollar loans have interested many investors.
Moreover, the growth of economies all over the world, especially the increase in world trade, has created a need for additional sources of short-term funds. Finally, until August 1971, the exchange rate stability of the dollar has constituted another attraction of the market.
The Eurodollar market has been increased in part by the U.S. balance of payments' deficits. According to a data prepared by the U.S. Department of Commerce, foreign- owned demand and time deposits in U.S. banks, together with foreign-owned liquid dollar assets such as U.S treasury bills and commercial paper, totaled more than $43 billion. The foreign central banks and other official foreign financial institutions held approximately $20 billion of those funds and private parties $23 billion at that time.
The amount of the Eurocurrencies outstanding at the end of 1970 is estimated by the Bank for International Settlements (BIS) to total the equivalent of about $57 billion, including $46 billion in Eurodollars. Evidence of the rapid growth of the market is that the total currencies outstanding on it were estimated at only $1.5 to $2 billion in 1961 and at $7 billion in 1964.
Although much foreign trade is financed on it, the Eurodollar market is largely a private credit market supplying business working capital and conducted by foreign commercial banks in dollars and certain other currencies.
It carries out internationally the basic functions that a domestic money market performs within a given country. It provides an international mechanism and the institutions for moving funds from corporations, banks, and others with temporary surpluses to those with temporary shortages. In that way, it associates the domestic money markets of many countries.
A certain discrepancy is apparent in the figures showing Eurodollar holdings and U.S. short-term liabilities cited in the preceding paragraphs: the total liquid U.S. liabilities to private foreign parties are estimated at $23 billion and the dollar component of the Eurodollar market at $46 billion.
In other words, the Eurodollar holdings were estimated at approximately twice the U.S. dollar liabilities to private foreign parties. A similar discrepancy is found in the IMF international liquidity statistics showing the difference between the foreign exchange holdings of the various national monetary authorities, on the one hand, and the sum of the liquid liabilities of the U.S. and the U.K. to official foreign creditors on the other. This discrepancy has grown from less than $1 billion prior to 1966 to almost $14 billion at the end of 1970.
In view to all the available facts, it is too large to be explained solely by the increase in the holdings of other currencies.
