Lesson #5

The Explosion of the Euro-market

A major catalyst to the growth of Forex trading was the rapid development of the Eurodollar market- where U.S. dollars are deposited in banks outside the U.S. In addition, Euro-markets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue – all in dollars – was deposited outside the U.S. in fear of being frozen by U.S. regulators. This gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euro-markets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euro-markets a highly attractive alternative for holding excess liquidity, as well as for providing short-term loans and financing of imports and exports.

London was, and remains the principal offshore market place. In the 1980s, London became the financial center of the Eurodollar marketplace when British banks began lending dollars as an alternative to pounds sterling in order to maintain their leading position in global finance. The geographical location of London (operating during Asian and American market hours) is also instrumental in preserving its dominance in the Euro-marketplace.