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Eurocurrency Market

Presented by
Suresh George Jacob
Sreeraj R
Sreelekha S
Meaning and Scope
Eurocurrency/Eurodollar is the currency deposited
outside the country of its issue.

The commercial banks accept interest bearing


deposits denominated in a currency other than the
currency of the country in which they operate.

They re-lend these funds either in the same currency


or in the currency of the country in which they operate
or in the currency of a third country.
Important Features
1. It is an international market and it is under no
national control.

 The dollar deposits in London are outside US control


because they are in London

 It is outside the British control because they are in


dollars.
Important Features
2. It is a short-term money market.

 The deposits in this market range in maturity from one


day to several months and interest in paid on all of
them
3. It is a wholesale market.

 The size of the individual transaction is usually above


$ 1 million
Important Features
4. It is a highly competitive and sensible market.

 Supply and demand changes according to the interest


rates.
FACTORS CONTRIBUTED TO THE GROWTH OF
EURO CURRENCY
1. Relaxation of exchange control and resumption of
currency convertibility.
The general relaxation of exchange control , the
stability of the exchange market and the redemption
of the currency convertibility in western Europe in
1958 provided an added impetus to the growth of the
euro market .
FACTORS CONTRIBUTED TO THE GROWTH OF
EURO CURRENCY
2.The political factors
The cold war between the United states and the
communist countries also contributed to the euro
currency market.
3.Balance of payment deficit of the US
Deficit in the balance of payment in US meant an
increasing flow of US dollar to those countries which
had a surplus with the US .
FACTORS CONTRIBUTED TO THE GROWTH OF
EURO CURRENCY

4. The regulation of ‘Q’


Regulation of ‘Q’ which fixed the maximum rate of interest
payable to the banks in US and the prohibition of payment
of interest on deposit for less than 30 days very
significantly contributed to the fast growth of the euro
market.
5.Innovative banking
The advent of the Innovative banking ,spearheaded by the
US banks in europe and the willingness of the banks in the
market to operate on a narrow basis also encouraged the
growth of euro market.
FACTORS CONTRIBUTED TO THE GROWTH OF
EURO CURRENCY
6.Supplay of petrodollars
The flow of petro dollar facilitated by the increase in
the OPEC’S oil revenue following by the oil price hike
since 1973 has been a significant source of growth of
Euro currency.
THE PARTICIPANTS
Governments of all political categorizations
International organizations
Central Banks
Commercial Banks
Corporations
Supply and Demand
An Evaluation Of Eurodollar Market
Advantages
 Increases International liquidity
 Expands domestic credit creation
 Act as a ‘Vehicle currency’ For carrying world trade
 Globalization increases its importance
Disadvantages
 Affects international monetary Stability
Types of Transactions
1. Japanese Exporter, earning USD, keeps these USD
in London Bank (say AMEX)as Deposit.

2. AMEX bank may use such deposits for lending to


a French Importer.

3. Indian exporter, earning Japanese Yen, keeps


these Yen in Korea as Deposit

4. Nigerian Importer avails loan in INR from Russia


to import machinery from India.
Dominance of Dollar in the market:

– Dollar is a leading currency traded in the market


(about 90% to 95% market share)

– However other currencies are now emerging thus


reducing the role of dollar somewhat (about 80%
market share)
• Euro
• Japanese Yen
• Pound Sterling
Countries responsible for the growth
of the Euro-Currency Market:
– China (fear that its Fx in USD would be blocked)
– USA (indeed blocked identifiable Fx in USD
in1950, federal Reserve Act, regulation ‘Q’ and
‘M’; control and restrictions on borrowing funds
in US in 1965, and introduction of interest
equalization tax in 1963)
– Korea (War broke out in 1950)
– Russia (erstwhile USSR){because of their
banking presence in Paris and London}
– UK (policy of not granting sterling loan outside
sterling area in 1957)
Conclusion
The development of the International monetary system
and foreign exchange market has been Significantly
influenced by the growth of Eurocurrency Market.
But the advantages and disadvantages associated with the
Eurocurrency Market have given rise to the doubt
whether it is a welcome tonic or a slow poison to the
international system.

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