Eurodollar Update – Hunting The Black Swan
Guest Post by Jessie.
As you know eurodollars are US dollars held anywhere overseas by banks as a foreign currency liability or asset.
Eurodollars were formerly tracked by the Federal Reserve and were included in their M3 figures. In fact, the reason that the Fed stopped issuing its M3 is because it stopped tracking eurodollars. The other components remain.
But the Bank for International Settlements, or BIS, continues to track the dispersion and concentration of global currencies in their reporting banks in their quarterly reports. And this is the source I have been using to derive estimates in the magnitude and changes in dollars held overseas.
For more on M3 and eurodollars read here.
Even a casual glance at the data shows that there was a trend change in the growth of eurodollars in the mid 1990′s. This trend is something I have identified as one potential source of a US dollar crisis if the currency begins to fall in value or lose its appeal US in an uncontrolled manner.
I have not tracked the actual source of the eurodollar growth although it seems to be tied to the trade deficit and a variety of components in the Balance of Payments.
My current estitmate of eurodollars is 2.25 trillion which is not insignificant even in these days of an exploding Fed Balance Sheet.
As an aside, the last time the US repatriated funds held by US companies overseas through a tax reduction program was in the 2005 Homeland Investment Act.That seems to have had no material effect on the level of eurodollars at least judging from the charts, and probably did more to inflate the income of the wealthy and stock prices.
During the financial collapse there was a eurdollar short squeeze, primarily in Europe. This is because the dollar denominated assets which they held against their dollar liabilities because to collapse in value, in large part due to the mispricing of risk and fraud.
The trend to an increase in Eurodollars has resumed after a steep drop after the financial crisis.
In the second chart we can see that the banks overseas have adjusted their shortfall, or ‘the squeeze,’ in part due to the swap lines that the Fed opened through their central banks to relieve the pressure.
|Last Official Report on Eurodollars from the Fed was in 2006 when they were just over $400 Billion|