A Eurodollar is a dollar deposit in a foreign bank, normally a European bank. The foreign bank need not be owned by foreigners--it only has to be located in a foreign country. For example, a Citibank subsidiary in Paris accepts Eurodollar deposits. The Frenchman's deposit at Chase Manhattan Bank in New York is not a Eurodollar deposit. However, if he transfers his deposit to a bank in London or Paris, it would be.

The existence of the Eurodollar market makes the Federal Reserve's job of controlling U. S. interest rates more difficult. Eurodollars are outside the direct control of the U. S. monetary authorities. Because of this, interest rates in the U. S. cannot be insulated from those in other parts of the world. Thus, any domestic policies the Federal Reserve might take toward interest rates would be affected by the Eurodollar market.