![]() ![]() This gives the Fed the motive and the means to respond with an easing cycle later this year. Since we published that outlook, there have been clear signs of decelerating US price pressures, and it also looks like the US economy heading toward a recession. Instead, the year is shaping up a little better than most had imagined. Those inputs were:īack then, we sided with a more negative set of outcomes and felt that EUR/USD could end 2023 near parity. In it, we presented a scenario analysis and argued that the permutations of four major inputs would determine where EUR/USD would trade in 2023. We undertook our last major FX forecast round with the release of our 2023 FX Outlook, ‘ The dollar’s high-wire act’. The same can be said for foreign exchange strategists making FX forecasts. To check out additional interest rate data, visit the Federal Reserve Board Statistical Releases listed below as references.To quote a former UK Prime Minister, when asked about the most significant challenges faced by his administration, the answer came: “Events, dear boy, events”. As noted in Instruments of the Money Market, in the competitive money markets, “Arbitrage keeps interest rates closely aligned between Eurodollar deposits and deposits with roughly comparable characteristics at banks located in the United States.” secondary market certificate of deposit (CD) rate shown in red.Īs you can see, the rates are nearly identical, rarely varying by more than several basis points over 15 years of weekly data. dollars) shown in blue and the 3-month U.S. You can see this in the following chart it shows the very close relationship between a 3-month LIBOR interest rate (denominated in U.S. and Eurodollar interest rates of a similar maturity. In fact, in today’s global financial markets, there is a strong correlation between short-term U.S. Mishkin and Eakins explain in Financial Markets and Institutions, (2000) that because overnight LIBOR and overnight federal funds interest rates tend to be “near-perfect substitutes” the interest rates in these two markets tend to track each other very closely. banks with an alternative to short-term borrowing in the domestic overnight federal funds market. An active secondary market allows investors to sell Eurodollar CDs before the deposits mature.Įurodollars provide large U.S. LIBOR is the rate at which major international banks are willing to offer term Eurodollar deposits to each other. LIBOR is defined in Chapter 5 of Instruments of the Money Market: However, consumers may be familiar with the term LIBOR because LIBOR interest rates are commonly used as an index to determine interest rates on adjustable rate mortgages and business loans in the United States. ![]() The term “interbank” refers to the fact that this is a market for banks and financial institutions, rather than individuals or nonfinancial businesses. LIBOR refers to the London Interbank Offered Rate, a money market interest rate that has become a standard in the interbank Eurodollar market. For the most part, banks offering Eurodollar deposits are located outside the United States.Įurodollars originated in London during the Cold War but are now held at banks around the world, and today they constitute one of the largest short-term money markets in the world. Chapter 5 (on Eurodollars) provides the definition for these deposits:Įurodollars are bank deposit liabilities denominated in U.S. A good place to start is the Federal Reserve Bank of Richmond online publication, Instruments of the Money Market. Good question! To provide the answer, we’ll need to travel overseas to check out the international money markets.īefore discussing LIBOR, you should know about Eurodollars. ![]()
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