Those Euro-Dollars

"Euro-dollars, indeed!" snorts the senior partner of a London banking house. "It's hot money--and I prefer to call it by that name." By whatever name it is called, a new, hybrid medium of exchange is now at work financing trade between the nations of the free world.

This new international trading currency consists of nothing more than U.S. dollars that have gone to Europe as a result of the U.S. balance-of-payments deficit--and that have stayed there because interest rates in Europe are higher than in the U.S. The spread in interest rates means that a foreign bank that holds dollars can lend them out overseas for more than they would earn in the U.S., yet still charge the borrower less than he would have to pay for a loan in local currency.

Today, an estimated three billion Eurodollars circulate through Europe's banking community. German, Dutch or Swiss banks that are rich in foreign reserves regularly deposit their dollars in London--which already seems destined to become the financial capital of the Common Market. London banks, in turn, relend the Eurodollars in Italy and Japan, where interest rates on foreign trade credits are particularly high. U.S. branch banks in Europe, eager to get into the profitable trade, have begun to court Eurodollar deposits by paying higher interest rates on them than is permissible in the U.S.

Some European and U.S. bankers fear that the endless lending and relending of Eurodollar balances has already led to a dangerous pyramiding of credit. Fortnight ago, U.S. Under Secretary of the Treasury Robert Roosa urged Congress to try and lure the wandering dollars home by eliminating U.S. interest ceilings on deposits from foreign central banks.

But other bankers and economists argue that the brisk trade in Eurodollars has had at least two beneficial results: 1) it has helped meet the growing demand for trade credits among Western nations; 2) it has discouraged foreign banks from converting their dollar balances into U.S. gold, and thus has eased the drain on Fort Knox. The Eurodollar, most experts agree, will gradually disappear if U.S. interest rates rise to European levels, or the U.S. payments deficit ends.

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