Why Eurodollars Might Be Ground Zero for De-Globalization

Tracy Alloway (0:12)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, you like to talk about money, right?

Joe Weisenthal (0:21)

I love talking about money. I think where money comes from, its origins, stuff like that, or even just what it is, is one of those topics that I can never get enough of. So what is that, are we gonna talk about that today?

Tracy Alloway (0:35)

Yeah, we are. But we're gonna talk about a type of money that doesn't normally get a lot of attention outside of certain aspects of the financial community.

We are going to be talking about Euro dollars.

Joe Weisenthal (0:49)

So Euro dollars, you know what, I have to say, like this is one of those topics that I know I'm supposed to know a lot more about than I do. I kind of vaguely get this idea that people use futures in Euro dollars to bet on what they think the Fed is gonna do.

But then beyond that, like what, and I guess, and I kind of have this sense that they're dollars held outside of banks that aren't in the US., but honestly, I know very, I know embarrassingly little about them and how they actually work and what their point is.

Tracy Alloway (1:22)

Well, you're being very modest as usual.

Joe Weisenthal (1:25)

No, actually, in this case, I'm really not. Like that's, I just told you the extent to which I know. Like I don't even really get how it works. Like I don't even get how you can hold a dollar at a bank outside the US. Like in the first place, that's a very strange concept to me because I have this conception of like how banks hold money and I don't really understand how that can happen outside the US. So the whole thing is very mysterious to me and I'm glad we're finally doing an episode that will hopefully clear it up.

Sometimes I'm modest, but this time I'm not.

Tracy Alloway (1:53)

Okay, well, mysterious is actually the key word here. So just to boil it down really simply before we start, Eurodollar basically refers to US dollar denominated deposits that are at foreign banks and by foreign, I mean non-U.S.

or foreign branches of US banks. So that's the simplest explanation. But of course, there is a lot of sort of mystery and controversy swirling around these. Lots of people think this is a sort of form of like shadow bank liquidity that's floating around in the system outside of the Federal Reserve's control.

People talked about it a lot during the financial crisis, and we are seeing some people talking about it again with the recent market sell-off. And one of those people is our guest for today.

Joe Weisenthal (2:40)

Before we get into this, can I just say, do you think anyone else like me first when they heard the word Eurodollar just thought that was what the Euro was? That like the Euro was short for Eurodollars?

Tracy Alloway (2:52)

Oh, Joe, surely not.

Joe Weisenthal (2:54)

For years when I heard Eurodollar, I just assumed that the Euro was just the nickname for Eurodollars. I know that's not the case right now, but just to really emphasize how ignorant I am on this topic, that really is what I thought for years until I realized it was something else.

Tracy Alloway (3:09)

No, you're absolutely right. Lots of people think Eurodollar is just the exchange rate. So for the avoidance of doubt, we are not going to be talking about the Eurodollar cross exchange rate. That's not what this is about. This is about something much more interesting about a specific type of money that's actually quite important to the way the financial system works.

So without further ado, let's bring on our guest. It is Jeffrey Snider. He is head of global research at Alhambra.

Jeffrey, thank you so much for joining us.

Jeffrey Snider (3:43)

Good morning. Thanks for having me, Joe and Tracy.

Tracy Alloway (3:46)

So given Joe's lack of expertise in this particular topic, maybe we should start really, really slow with... Sorry, Joe, that's very patronizing.

Joe Weisenthal (3:57)

Please. No, no, no, please.

Tracy Alloway (3:59)

But let's start slow. What exactly is a Eurodollar?

Jeffrey Snider (4:04)

Well, you know, I mean, it's a common misperception, and I think you guys explained it pretty well. I mean, lots of people, they hear the term Eurodollar, and they think obviously Euro, because that kind of term and that kind of terminology isn't common in usage. And most people, they've never heard of a Eurodollar before anyway, so it's not uncommon for this to be a very confusing topic.