Eurocurrency Market

UNIT 3
Chapter-4

What is Eurocurrency?
Eurocurrency is the term used to
describe deposits residing in banks that
are located outside the borders of the
country that issues the currency the
deposit is denominated in.
For example: a deposit denominated in US
dollars residing in a Japanese bank is a
Eurocurrency deposit, or more specifically
a Eurodollar deposit.

How it Originated?
After the Second World War, the amount of U.S.
dollars outside the United States increased
enormously.
As a result, enormous sums of U.S. dollars were
in custody of foreign banks outside the United
States.

During the Cold War period, especially after the

invasion of Hungary in 1956, the Soviet Union
feared that its deposits in North American banks
would be frozen as a retaliation.

It decided to move some of its holdings to the

Moscow Narodny Bank, a Soviet-owned bank
with a British charter.
The British bank would then deposit that
money in the US banks. There would be no
chance of confiscating that money, because it
belonged to the British bank and not directly
to the Soviets. On February 28 1957, the sum
of $800,000 was transferred, creating the first
eurodollars.

Gradually, as a result of the successive

commercial deficits of the United States, the
eurodollar market expanded worldwide.
Thus, the currencies involved in the
Eurodollar market are in no way different
from currencies deposited with banks in the
home country. It is only that Eurodollar is not
under the orbit or surveillance of the
monetary policy, where the currency in their
home country is under the regulation of the
national monetary policy

Features of Eurocurrency Market

1. It is an international market and it is under no
national control: It has come up as the most important
channel for mobilizing and deploying funds on an
international scale.

2. It is a short term money market:

3. Eurodollar markets are the time-deposit market.
The deposits here have a maturity period ranging
one day to several months. Eurodollar is the shortterm deposit. It is a wholesale market:

It is so because Eurodollar is the currency that is dealt in

only large units.
Size of individual transaction is usually above $1million.

4. It is highly competitive and sensible market:

High
competitive:
This
market
is
characterized as highly competitive because
the market is growing and accepted
internationally.
Sensible: The Eurodollar market is said to be
sensible because it responds faster to the
changes in demand and supply of the funds
and also reacts to changes in the interest
rates.

Factors for the Expansion

1. The Suez Crisis: (1957)
It was a crisis whereby the sterling credit
facilities were unable to reach Britain
provided speed to the growth of Eurodollar
Market.
The British banks ultimately found a good
substitute in dollars. As there was already
available pool of USD held by residents
outside US.

2. Relaxation of Exchange Control and

Resumption of Currency Convertibility:
Resumption of currency convertibility was seen in
Europe (1958)
SURPLUS

DEFICIT

EUROMARKET

3. Political Factors:

It was cold war led to growth of Eurodollar

Market.

As the communist countries had a fear that their

dollars deposited in banks in the US, would be
seized due to hostilities.
It was then the Russian and European banks
preferred to transfer their dollars with European
banks.

4. Balance of Payment Deficit of US:

It means that the outflow of dollars from US
increased to other nations.
It was in 1950 that US started facing the
problem of deficit, but it was in 1958 that the
problem reached to the saturation point.
The outflow of USD contributed as a factor for
expanding Eurocurrency market.

5. Regulation Q:
Regulation Q was a United States
government regulation which fixed the
maximum interest payable by the banks in
US and restricted the payment of interest on
deposits less than 30 days.
Unlike US, Eurodollar market paid interest on
the deposits of less than 30 days.

Participants in Eurocurrency Market

1.
2.
3.
4.
5.
6.
7.
8.

Government
International Organizations
Central Banks
Commercial Banks
Corporations
MNC
Traders
Individuals

Participants have contributed in the demand and supply of

the fund, in the following way:
Supply:
1. Central Banks of various countries are the suppliers;
they channel the fund through BIS.
2. Increase in the Oil Revenue of the OPEC has added to
the fund.
3. MNCs and the traders place their surplus funds for the
short-term gains.
Demand:
1. Government demand for these funds to meet the
deficit arising due to meet the deficit arising due to the
deficit in Balance of Payment and the rise in the oil
prices.
2. Commercial Banks needs extra fund for lending.
Some also borrow for the better window dressing in
the year-end.

Advantages
1. It helped the economies to solve the liquidity
problems:
2. It provided better investment opportunities.
3. Funds are also by the commercial banks of
various countries for domestic credit creation
and window dressing.
4. This facilitated the growth and development of
various countries like Brazil, South Korea,
Taiwan, and Mexico etc
5. Its International acceptance has helped in the
international trade to expand and accelerated
the process of globalization.

Disadvantages
1. For many economies it is a new concept.
2. For many economies also considered that
the speed of its growth or expansion is TOO
fast.
3. For many economies, they feel this market
gives a chance to avoid many a regulations
that they try to impose on their national
money market.