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Euro(¼) is a single currency which was launched on 1st Jan¶99. (with 11 of 15 member countries of the European Union participating in the experiment) .  Now Euro(¼) is the official currency of 16 of the 27 member states of the European Union (EU). These 16 states include some of the most technologically advanced countries of the European continent and are collectively known as the Eurozone. The Euro is an important international reserve currency. Euros have surpassed the US dollar with the highest combined value of cash in circulation in the world. 

The Euro was recognized in the Maastricht Treaty in 1992.  The name euro was officially adopted on 16 December 1995.  The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. The currency was introduced initially in non-physical forms, such as travelers' checks and electronic banking.  Euro coins and banknotes entered circulation on 1 January 2002.  The Euro is administered by the European Central Bank (ECB) based in Frankfurt, and the Eurosystem, comprising of the various central banks of the Eurozone nations. 

The states, known collectively as the Eurozone, are Austria, Belgium, Cyprus, Finland,France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The currency is also used in a further five European countries, with and without formal agreements. and is consequently used daily by some 327 million Europeans. Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.

Benefits of the Euro ( )
The most important implications of having a common currency, the Euro, are: Exchange rate certainty while travelling across Europe No exchange risk and, therefore, no cost of hedging against it No transaction costs Increased transparency and fewer transactions for importers and exporters Increased liquidity in the United Euro financial market

Cont.. ‡ In economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the Eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g., credit cards, debit cards and cash machine withdrawals). The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones. Companies that hedge against this risk will no longer need to shoulder this additional cost. This is particularly important for countries whose currencies had traditionally fluctuated a great deal, particularly the Mediterranean nations. Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the Eurozone.




Effect of the Euro on Other Currencies 
A number of currencies are pegged to the Euro. Those are the B&H konvertibilna marka, Lithuanian litas, Bulgarian lev, Moroccan dirham, Cape Verdean escudo, Pacific franc, Danish krone, Slovak koruna, Estonian kroon, Central African CFA franc, Hungarian forint, West African CFA and the Comorian franc.  This implies that the value of these currencies would depend significantly on the performance of the Euro. If the Euro exchange rate goes up, the value of these currencies would appreciate as well and if the Euro falls, the values of these currencies are sure to come down as well. Hence, the Euro exchange rate occupies a critical position in the context of world finance.

Usage as reserve currency
Since its introduction, the euro has been the second most widely-held international reserve currency after the U.S. dollar. The share of the euro as a reserve currency has increased from 17.9% in 1999 to 26.5% in 2008, at the expense of the U.S. dollar (its share fell from 70.9% to 64.0% in the same timeframe) and the Yen (it fell from 6.4% to 3.3%). The euro inherited the status of the second most important reserve currency . The euro remains underweight as a reserve currency in advanced economies while overweight in emerging and developing economies: according to the IMF the total of euros held as a reserve in the world at the end of 2008 was equal to USD 1.1 trillion, with a share of 22% of all currency reserves in advanced economies, but a total of 31% of all currency reserves in emerging and developing economies. The possibility of the euro becoming the first international reserve currency is now widely debated among economists. It is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.

Graph showing the fluctuation of EUR vs INR

Euro Exchange Rate: US Dollar vs. Euro
‡ After the Euro was introduced as a cash currency in 2002, the US dollar began to steadily depreciate in value. This was due to a persistent increase in the US trade and budget deficit. By December 2004, the US dollar started falling against all major currencies and the Euro rose above $1.36/ for the first time. An interest rate reduction by the US Federal Reserve on September 18, 2007 caused the US dollar to decline to new record lows of below $1.43 by October. In 2008, the Euro strengthened further to around $1.60. At the end of March 2009, the Euro stood at $ 1.3308. Now (15.09.09) it is $ 1.4561

Exchange Rates
1 EUR = 70.963 INR or 1 INR = 0.01408 EUR 1 USD = 48.735 INR or 1 INR = 0.0205191 USD 1 EUR = 1.4561 USD or 1 USD = 0.686766 EUR
* Data as on 15.09.09

Exchange Rate of Euro with some Major Currency

As on 15.09.2009

European Central Bank (ECB)
The European Central Bank (ECB) is one of the world's most important central banks, responsible for monetary policy covering the 16 member States of the Eurozone. It was established by the European Union (EU) in 1998 with its headquarters in Frankfurt,Germany. Technically the predecessor to the ECB was the European Monetary Institute (EMI). The EMI was established at the start of the second stage of the EU's Economic and Monetary Union (EMU) to handle the transitional issues of states adopting the euro and prepare for the creation of the ECB and European System of Central Banks (ESCB). The EMI itself took over from the earlier European Monetary Co-operation Fund (EMCF). The ECB formally replaced the EMI on 1 June 1998 by virtue of the Treaty on European Union (TEU, Treaty of Maastricht), however it did not exercise its full powers until the introduction of the euro on 1 January 1999, signalling the third stage of EMU. The bank was the final institution needed for EMU, It was established on 1 June 1998. The first President of the Bank was Wim Duisenberg (1935-2005), the former president of the Dutch central bank and the European Monetary Institute.




ECB-Powers and objectives
‡ The primary objective of the ECB is to maintain price stability within the Eurozone, or in other words to keep inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of below, but close to, 2%. Unlike for example the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it. The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the money market infrastructure under the Target payments system. Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins). The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system.



ECB-Independence and future
‡ The ECB is designed to be independent of political interference. It also has financial independence by virtue of its having its own budget, separate from the EU's budget, sourced from national central banks. Its political independence was an attribute taken from the bank it was modelled after, the German Bundesbank, due to a consensus amongst economists that an independent central bank was the best way to avoid manipulation of the macro economy for political purposes. Furthermore, not only must the bank not seek influence, but EU institutions and national governments are bound by the treaties to respect the ECB's independence by not seeking to influence its decision-making bodies. This is also aided by the members of the bodies having security of tenure. For example, the minimum term of office for an national central bank governor is five years and members of the executive board have a non-renewable eightyear term. To offer some accountability, the ECB is bound to publish reports on its activities and has to address its annual report to the European Parliament, the European Commission, the Council of the European Union and the European Council. The European Parliament also gets to question and then issue its opinion on candidates to the executive board. The bank's independence has notably come under intense criticism since the election of Nicolas Sarkozy as French President. Sarkozy has sought to make the ECB more susceptible to political influence, to extend its mandate to focus on growth and job creation, and has frequently criticised the bank's policies on interest rates.


Payments clearing, electronic funds transfer
‡ All intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This includes all member States of the EU, even those outside the Eurozone providing the transactions are carried out in euro. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic, however paper-based payment orders, like cheques, have not been standardised so these are still domestic-based. The ECB has also set up a clearing system, TARGET, for large euro transactions.

Factors affecting the Euro s Exchange Rate
There are number of factors which will affect the Euro¶s Exchange rate. These factors can be divided into two categories;1 European internal factors. 2 External factors. European internal factors. In the medium term, exchange rates are determined principally by fundamental economic factors as growth, inflation, productivity, budget, balances, current balances, and the relative supply of domestic & foreign assets. The independence of the European Central Bank (ECB) and a budgetary policy designed to avoid excessive deficits constitute the foundations on which the monetary policy aimed at maintaining stability and sustainable growth will be based. An internal policy mix combining price stability and budgetary discipline would mean that there would be neither upward nor downward pressures on the euro¶s exchange rate.

External factors: International supply of and demand for, euros as opposed to dollars: The impact of portfolio movements on the euro¶s exchange rate could be limited, firstly because there will be opposing trends, reallocations in favour of the euro by non-European investors attracted by the European financial market, aiming to diversify their risks. Secondly, a diversification of international portfolios away from the dollar has already been underway since the beginning of the 1980s and reallocations in favour of the euro are likely to occur only gradually since economic agents have to be convinced of the euro¶s intrinsic qualities. As regards international foreign exchange reserves, a movement towards the euro could occur, principally in the Central and Eastern European countries, although that movement is likely to be gradual and its impact on the euro¶s exchange rate would still be limited given the relatively minor economic importance of those countries . There is also a risk of surplus dollars in the ECB¶s official reserves, which could lead to a depreciation of the dollar. However, that surplus will probably be disposed of gradually in order to avoid turbulence on the foreign exchange market.

Any currency banked outside its country of origin. Example US dollar banked in England Euro bank A financial institution that readily accepts foreign currency denominated deposits and makes foreign currency loans. Example Euro Currency Bank at Frankfurt franc

‡ The international currency markets, also known as offshore markets where currencies are borrowed and lent. ‡ Each currency has a demand and a supply in these markets. ‡ Dollar deposits outside USA or sterling deposits outside UK are called offshore funds and have a market, so long as they are convertible and readily usable in international transactions. ‡ Convertible currency is defined as one, which is widely, accepted international payments and whose country does not have Current account controls under Article VIII of the I.M.F. Agreements. ‡ Thus Euro-currency market is a market principally located in Europe for lending and borrowing the Worlds most important convertible currencies, namely dollar, sterling, French franc, yen, etc.

- A deposit in the relevant currency with a bank outside the home country of that currency. - A US dollar deposit with a bank in London is a Eurodollar deposit, a Sterling deposit with a bank in Luxembourg is a Euro sterling deposit. - A Eurodollar Loan is a dollar loan made by a bank outside the US to a customer or another bank. - Note «.(Location of the bank matters, neither the ownership of the bank nor the ownership of the deposit)

Currencies ‡ Austrian Schilling ‡ Belgian Franc ‡ Dutch Guilder ‡ Finnish Markka ‡ French Franc ‡ German Mark ‡ Irish Punt ‡ Italian Lira ‡ Luxembourg Franc ‡ Portuguese Escudo ‡ Spanish Peseta Country Austria Belgium Netherlands Finland France Germany Ireland Italy Luxembourg Portugal Spain

Eurocredits Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and government borrowers. Eurocredit market ‡ Comprises banks that accept deposits and provide loans in large denominations and in a variety of currencies. ‡ The banks that constitute this market are the same banks that constitute the Eurocurrency market; the difference is that Eurocredit loans are longer-term than so-called Eurocurrency loans. ‡ Although the Eurocurrency market focuses on large-volume transactions, there are times when no single bank is willing to lend the needed amount. ‡ A syndicate of Euro banks may then be composed to underwrite the loans. Front-end management and commitment fees are usually charged for such syndicated Eurocurrency loans.

‡ A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange. ‡ Depositary receipts make it easier to buy shares in foreign companies because the shares of the company don't have to leave the home state.

American Depositary Receipt ADR
‡ A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction. This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in Euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq.

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Global Depository Receipt (GDR)
‡ A Global Depository Receipt or Global Depositary Receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. ‡ Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. ‡ Prices of GDRs are often close to values of related shares, but they are traded & settled independently of the underlying share. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. They trade on the International Order Book (IOB) of the London Stock Exchange. Normally 1 GDR = 10 Shares, but not always.
‡ A GDR is very similar to an American Depositary Receipt (ADR).

Global Depositary Receipt GDR
‡ A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. ‡ A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros. ‡ A GDR is very similar to an American Depositary Receipt. ‡ These instruments are called EDRs when private markets are attempting to obtain Euros.

‡ ‡ History !950s. Eastern Europeans, fearing U.S. seizure of their dollars to reimburse U.S. citizens for property expropriated by their governments, deposited them in foreign banks (mostly in London). ± Other events: ‡ Britain 1957 prohibited banks from financing non-British trade. ‡ U.S. 1960s discouraged banks from lending to non-US residents. ‡ Oil crisis 1970s led to huge amount of dollars amassed by OPEC countries. They did not want them to be in the US because they were afraid that they would be confiscated by the US government. Gave opportunity to those who wanted to deposit or borrow dollars (later,other currencies, as well).


Dealers in the Market
‡ International banks or multi-national banks and foreign branches of domestic bank, Private banks, Merchant banks and other banks ‡ In fact, most of the US banks also deal in this market.

LONDON INTER-BANK OFFER RATE(LIBOR) - An index of the rate which a bank in London will charge another bank for a short-term loan. - LIBOR varies according to the term of the deposit. - Three-month LIBOR & Six-Month LIBOR - Deposits range in maturity from overnight upto one year. - LIBOR also varies according to the currency in which the loan or deposit is denominated. LONDON INTER-BANK BID RATE(LIBID) - The rate which a bank is willing to pay for deposits accepted from another bank

Interest Rate Spreads in Domestic and Eurocurrency Markets

Rate of interest Domestic lending rate

Eurocurrency lending rate Eurocurrency deposit rate

Domestic deposit rate 0%

EUROPEAN MONETARY SYSTEM ‡ A fixed-exchange-rate system in which countries co-operated to maintain exchange rates within permissible bands.(say ..+ or ± 2.25%) ‡ A procedure involving the exchange rate mechanism for fixing exchange rates among the European union countries.

International Money market instruments
Euro Commercial paper - A corporate short-term, unsecured promissory note issued on a discount to yield basis - Maturities do not exceed 270 days. - ECP emerged in the 1980¶s Euro Certificates of deposits - Negotiable claims against deposits with a bank. - These are marketable instruments - Issued mainly in London by banks - Interest on CDs with maturity exceeding one year is paid annually - On Floating rate CDs with maturities ranging from 18 months to 5 years, interest rate is periodically reset, indexed to LIBOR, Treasury bill rate Bankers¶ acceptances - A short-term discount instrument that usually arises in the course of international trade.

‡ A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange. Depositary receipts make it easier to buy shares in foreign companies because the shares of the company don't have to leave the home state.


Global Depositary Receipt GDR
‡ A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros. A GDR is very similar to an American Depositary Receipt. These instruments are called EDRs when private markets are attempting to obtain Euros.

‡ ‡ ‡

Sources & References

³International Finance´ by Maurice D. Levi ³International financial management´ by P G Apte