The Eurodollar Market and the Foreign Demand for Liquid Dollar Assets

Abstract

PRIOR TO THE 1960s virtually all foreign holdings of liquid dollar assets took the form of U.S. private and governmental liabilities to foreigners. The development of the Eurodollar market has introduced a large volume of international liquidity in the form of dollar liabilities of foreign commercial banks, equal to or larger than the volume of U.S. liquid liabilities to foreigners. Part I of this paper discusses the foreign demand for liquid dollar assets both American dollars and Eurodollars, and the substitutability among Eurodollar deposits, American liquid dollar assets and nondollar liquid assets. Part II is mainly concerned with how the operations of the Eurodollar market affect foreign private or non-ofElcial holdings of American liquid dollar assets relative to foreign official holdings of American liquid dollar assets. These latter effects, which are of special importance for the U.S. balance of payments, are determined in large part by the pattern of demand for the two categories of liquid dollar assets. In the following analysis, I assume that Eurodollar deposits arise from the deposit of American dollars in a bank outside the United States, and that the ultimate borrowers of Eurodollars want American dollars for making dollar payments, or for making non-dollar payments by converting the borrowed dollars into nondollar currencies, or for increasing their holdings of American dollars. I also assume that