What Is the Eurodollar? The Dollar America Didn’t Create — the Invisible Monetary System Underpinning Global Capitalism

Imagine a Brazilian company buying machinery from South Korea. A dollar-denominated loan is extended to it by the London branch of a Japanese bank. Neither the buyer, the seller, the bank nor the place where the deal is concluded is American. And yet the price is in dollars, the debt is repaid in dollars, and the interest-rate risk ultimately depends on decisions made by the U.S. central bank.

Where did those dollars come from?

The easiest assumption is that they must previously have come from the United States. Sometimes they did. But this is where intuition begins to mislead us. The global dollar system has long since become something far stranger than a network through which American money simply flows out into the rest of the world. A vast part of the dollar universe exists outside America itself, governed by rules most of its users never see.

This is where the story of the Eurodollar begins — something that has nothing to do with the euro, and increasingly little to do with Europe.

A dollar that never had to see Europe

A Eurodollar is not a euro, nor does it have anything to do with the euro-dollar exchange rate. In the strictest definition, it is a dollar deposit booked at a bank or bank branch outside the United States. A deposit at the London branch of an American bank is a Eurodollar. A deposit at the New York branch of a German bank is not. Today such dollars move through London, Singapore, Zurich, Dubai and the Cayman Islands, but the historical name has survived.

The term is also often used more broadly to describe the entire offshore dollar ecosystem: loans, bonds, interbank borrowing and currency swaps through which institutions outside the United States promise to deliver dollars in the future. The strict definition and the wider system are not the same thing, but they belong to the same machine. The dollar stopped being merely the national currency of a single country a long time ago. It became the basic unit of account of global capitalism.

No gathering of governments ever sat down and decided to create a second dollar system. It grew through gaps between national laws, global demand for dollars and finance’s very old ability to turn every border into a business opportunity.

London lost the pound but kept the cash desk

After the Second World War, the dollar became the principal currency of international trade and reserves. Europe needed dollars for imports, investment and reconstruction, while London already had the bankers, legal infrastructure and global connections. Britain was losing its empire and sterling was retreating, but the City found a new role: trading in the currency of the new hegemon.

By 1955, a London bank was already offering higher interest on dollar deposits than American banks were permitted to offer at home. Banks outside the United States did not bear the same costs of U.S. reserve requirements, deposit insurance and interest-rate restrictions, which meant they could offer savers more while often charging borrowers less. Did the United States object? Not at all. American regulation did not stop dollar banking. It helped drive it across the Atlantic.

British authorities protected sterling but did not impose the same restrictions on business conducted in foreign currencies. American authorities tolerated the system because offshore transactions could still ultimately be settled through U.S. banks. Capital controls were supposed to preserve the postwar monetary order, but they also gave finance a reason to migrate beyond the territory where those controls applied. London never rebuilt the empire of sterling, but it found a lucrative business managing the empire of someone else’s currency.

In the 1970s, the machine acquired a new source of fuel. Oil-exporting countries accumulated enormous dollar revenues, and international banks "recycled" petrodollars into loans to Latin American governments and other borrowers. While interest rates remained low, the system looked like an elegant mechanism for turning surplus capital into development. Once U.S. interest rates rose, those same loans became a noose. Banks had collected the returns on the way up; the cost of adjustment was eventually borne by public budgets and living standards in debtor countries.

How a bank creates dollars without America’s permission

A bank does not have to find someone who has deposited exactly the same amount of pre-existing dollars before it can issue a new loan. When the London branch of a Japanese bank extends a $100 million loan to a Brazilian company, it can simultaneously enter two items on its books: the loan as an asset and a new dollar deposit belonging to the client as a liability.

That $100 million did not come out of a Federal Reserve printing press. It came into existence as a bank promise to deliver dollars whenever the client demands them. In ordinary business, that promise functions as money: it can be used to pay a supplier, buy securities or settle another debt. The bank has created dollar bank money outside the United States. Bank deposits are, in general, promises made by banks, and new deposits are created through lending.

This does not mean a bank can create money without limits. It still needs capital, liquidity, solvent borrowers and market confidence. If the Brazilian company pays an American supplier, the bank may have to draw on an account at a correspondent bank in New York, borrow dollars or obtain them through a currency swap. Lending can create a deposit, but it does not eliminate the need for settlement.

The global dollar is therefore not a flat network but a hierarchy of promises. At the top sit banknotes and reserves that can be created by the FED. Beneath them are bank deposits, offshore deposits and other private contracts promising payment in dollars. When confidence is high, they all look like the same dollar. A crisis begins, as you might guess, when holders of those promises suddenly demand what they regard as the "real" dollar.

The day the invisible ocean ran out of dollars

Before the 2008 crisis, European and Japanese banks had built enormous portfolios of dollar assets financed largely through short-term borrowing. As long as every maturing loan could be replaced with a new one, the system appeared infinitely liquid. After Lehman Brothers collapsed, banks stopped trusting one another, markets froze, and institutions outside the United States discovered that they had dollar liabilities but no secure source of dollars.

That was when the hierarchy revealed who stood at the top. The FED opened and expanded swap lines with selected foreign central banks. The FED supplies them with dollars; they lend those dollars to banks within their jurisdictions and assume the credit risk themselves. During the 2008–2009 crisis, outstanding swaps reached $585 billion. During the pandemic panic of 2020, they reached roughly $450 billion.

This was not philanthropy. Foreign banks starved of dollars could have dumped U.S. securities, withdrawn credit from American companies and transmitted the panic back into the United States. By rescuing the offshore market, the FED was also defending the domestic financial system. But in doing so, it became the ultimate backstop of a global dollar machine that it does not fully supervise in normal times.

Swap lines also reveal the political map of the monetary world. Not every central bank has equal access to the FED. Some receive a direct dollar bridge; others must burn through their reserves, sell assets, seek help from the IMF or allow their currencies to fall. The "global dollar" sounds universal, but its safety net remains selective.

An empire without a flag

The scale of this world is difficult to reduce to a single number because it extends across banks, bonds and off-balance-sheet contracts. The BIS nevertheless estimates that by the end of March 2026, dollar credit to non-bank borrowers outside the United States had reached $14.7 trillion. The measure is broader than traditional Eurodollar deposits because it includes bank loans and international bonds, but it illustrates the sheer size of a world in which companies and governments borrow in a currency they cannot create themselves. Around 30 percent of that debt was owed by emerging market and developing economies.

For a borrower outside the United States, this creates a very concrete danger. Its revenues may be in reais, lira or rupees while its debt is in dollars. When the FED raises interest rates, refinancing becomes more expensive. If the dollar strengthens, servicing the same debt requires more domestic currency. A problem that began on the balance sheet of a bank in London can then become lower investment, layoffs, more expensive government borrowing and pressure on public budgets thousands of kilometres away.

The FED formally sets policy according to inflation and employment in the United States. Its decisions, however, travel through offshore balance sheets and influence the cost of credit across the world. The American voter, one might say, at least indirectly participates in the political system that determines who leads the FED. A Brazilian worker who loses his job because his company can no longer refinance its dollar debt participates in none of it.

The Eurodollar is therefore not merely an exotic concept for money-market specialists. It reveals how global capitalism creates currency: privately, across borders and largely outside public view. The profits from expanding credit belong to banks and investors. When the network of private promises begins to break down, a public central bank is called upon to restore the value of money.

The dollar empire is not at its most powerful because every dollar is created in America. In this sense, its real power lies elsewhere: whenever an important dollar becomes frightened, it tries to run back to America.