Euro as a currency and Euro currency market

Euro as a currency
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Euro was launched on January 1 , 1999 in line with schedule set out by the Maastricht treaty.

Eleven out of fifteen member countries in the European economic and monetary union (EMU) linked their domestic currencies to Euro on December 31 , 1998

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The Euro is issued and administered by an European system of central banks (ESCB) ESCB comprises of European central bank and 11 national central banks which will set up the monetary policy and can alone authorize the issuance of Euro notes

Till January 1 , 2002 Euro was transacted in the form of electronic currency later replaced by Euro notes and coins From January 1 , 2002 the national currencies of 11 countries were replaced by Euro

Euro currency market

Euro currency market is also known as euro dollar market is an international capital market which specialises in borrowing and lending of currencies outside the country of issue.

Thus deposits in dollars with a bank in London are Euro - dollars Similarly French francs held by bank in London are Euro – Francs Pound sterling held by banks in Germany are Euro – Sterling All these are Euro - currencies

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The main center of Euro currency are London and a few other places in Europe The growth of market has now extended to Asian centers like Singapore and Hongkong The foundation of modern Euro currency was laid on 1949

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Features of the market
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Transactions in each currency take place outside the country of its issue Example: dollars earned by a Japanese firm from exports may be deposited with a bank in London

The London bank is free to use the funds for lending to any other bank. the bank may lend it to a French bank. Thus utility of currency is entirely outside the control of the central bank of the country issuing the currency. that is why Euro currencies also referred as offshore currencies

Even though the currency is utlised outside the country of its origin, settlement will take place in its country of origin When japanese firm deposited dollars with london bank the london bank will keep its funds in a newyork bank in its own name

When London bank lends the amount to French bank it will give instructions to New York bank which will debit London bank account and credit French bank account Thus settlement of dollars take place in new York

Though Euro currencies are outside the direct control of central bank of their issue but they are subject to some form of indirect control Euro – currency market is not a foreign exchange market

It is a market for deposits with and in between banks(interbank deposits) and loans by banks to non – bank public It is a market in which foreign currencies are lent and borrowed as distinct from foreign exchange market where they are bought and sold

It is a pool of short term deposits that help commercial banks to transform into medium term and occasionally long term international loans The transactions in the market involve huge amounts running into millions of dollars

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The rate of interest is linked with the base rate of LIBOR The interest on deposits and advances changes in accordance with change in LIBOR US Dollar remains the leading currency traded in the Euro – currency market

Euro currency market classification
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Euro – credit market Euro – bond market Euro – currency (deposits) market Euro – Notes market

Euro credit market
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Most of the lending's takes the form of Euro credits Euro – credits are medium term and long term loans provided by international group of banks in currencies which need not be lenders or borrowers It belongs to whole sale sector of international capital market and involve large amounts8

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Euro - Bonds

A major source of borrowings at Euro – markets is through issue of international bonds called Euro – Bonds Euro bonds are those sold for international borrowers in several markets simultaneously by international group of banks

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They are issued on behalf of MNC’s, international agencies and governments In the past borrowers were largely from industrial countries Now developing countries have entered the market on a large scale

Euro bond is different from foregn bond as a foreign bond is on behalf of a non resident borrower but sold in the domestic capital market of the issuing country by a group of banks A Japanese firm may issue foreign bond exclusively in west Germany

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Euro bond is outside the regulations of single country. Investors are spread world wide Types of euro bonds

1. Fixed rate bond 2. Convertible bond 3. Currency options 4. Floating rate note

Euro currency deposit market
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It represents the funds accepted by the banks themselves. deposits in currencies outside their home country The minimum deposi in ECD market is USD 50000 or its equivalent

Euro - Notes

These are the instruments of borrowings issued by corporations in the Euro currency market with or without underwriting support of the banks. This is a process where borrower approaches lender without intermediation of banks and FI”S

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