EURO CURRENCY MARKET

DONE BY:
NAMRATA BHASKAR
EURO CURRENCY MARKET
 The money market for borrowing and lending
currencies that are held in the form of deposits in
banks located outside the countries where the
currencies are issued as legal tender is known as Euro
currency market.
 The term Eurocurrency has nothing to do with the euro
currency or Europe. The prefix “Euro” is historical
indicating to the fact that the market was initially
centered in Europe. Today, however a deposit of US$
in a Japanese bank is still referred to as Eurocurrency.
 DEFINITION: The money market in which Eurocurrency,
currency held in banks outside the country where it is
legal tender, is borrowed and lent by banks in Europe. The
Eurocurrency market is utilized by large firms and
extremely wealthy individuals who wish to
circumvent(avoid) regulatory requirements, tax laws and
interest rate caps that are often present in domestic
banking, particularly in the United States,
 For E.g.: A deposit of US$ in a bank in France is a deposit
of Euro-dollar. The entire market for loans and deposits in
Eurocurrency is the Eurocurrency Market. The
Eurocurrency Market does not have buyers and sellers , it
has lenders and borrowers.
ORIGIN/ HISTORY:
 The Eurocurrency market originated in the aftermath of World War II when
the Marshall Plan to rebuild Europe sent a flood of dollars overseas. The
market developed first in London as banks needed a market for dollar
deposits outside the United States.
 Up until 1950’s, most international trade was conducted in £’s. But in
1956, the Suez Canal crisis put downward pressure on £. Attempting to
relieve the pressure, the Bank of England prohibited loans of £’s to foreign
borrowers. The banks did not like this because it took away a very profitable
piece of their business.
 Then the English banks decided to take deposits and make loans in US$ so
that they could continue to finance international trade, except with US$
instead of £’s. This is how Eurocurrency market originated.
FUNCTIONS :
 It is an International Market and it is under no National Control: The growth
of the market owes a great deal to the fact that it is outside the control of
any national authority.
 It is a Short-Term Money Market: The deposits in this market range in
maturity from one day to several months and interest are paid on all of
them. Loans in this market are made short term.
 It is a Wholesale Market: It is a wholesale market in the sense that the
Eurodollar is a currency dealt in only large units.
 It is a Highly Competitive and Sensitive Market: Its efficiency and
competitiveness are reflected in its growth and expansion. Its efficiency is
reflected in the responsiveness of the supply of and demand for funds to
the changes in the interest rates vice versa.
FACTORS CONTRIBUTING TO THE GROWTH:
 The Suez Crisis: Suez Crisis in 1957 provided a stimulus for the growth of the
Eurodollar Market. The British banks, in search of an alternative way to meet the
demand for credit on the part of the traders in this sphere, easily found a good
substitute in dollars.
 Relaxation of Exchange Controls The general relaxation of exchange control, the
stability in the exchange market and the currency convertibility in Western Europe
provided an added growth of the Eurocurrency market.
 The Political Factor: The cold war between the United States and the communist
countries also contributed to the growth of the Euro market.
 Balance of Payments Deficits of the US: deficit in the balance of payments of the
USA meant an increasing flow of the USA dollar to those countries which had surplus
with the USA. The USA had had a deficit in international payments every year since
1950, except in 1957.
 Innovative Banking: The advent of innovative banking, spearheaded by the American
banks in Europe and the willingness of the banks in the market to operate on a
narrow ‘spread’ also encouraged the growth of the Euro market.
 ADVANTAGES:

 Helped in minimizing international liquidity problems.

 Provided credit to finance the BOP deficits, enabled the
exporters and importers to obtain credit.
 Helped to meet short term credit requirements of business
corporations.
 Provided better opportunities for the investment of short term
funds.
 Helped to accelerate the economic development of certain
countries like South Korea, Brazil, Taiwan and Mexico
CONCLUSION
To sum it up:
The Eurocurrency market is:
• Characterized by lack of regulation compared to domestic
financial market.
• This means that you don’t have to pay for the cost of regulation.

• Hence, cheap money

 Downside:

• Banks could be more likely to fail

• Because you are getting foreign money, you have currency

exchange risks.