Western Europe: 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...