Eurocurrency Market Essay

1144 Words Apr 18th, 2016 5 Pages
Eurocurrency Market

Ray A. Gray II

FIN/366

March 28, 2016
Todd Kucker

Eurocurrency Market

A eurocurrency is any currency banked outside of its country of origin. The term eurocurrency is actually a misnomer because a eurocurrency can be created anywhere in the world; the persistent euro- prefix reflects the European origin of the market. Eurodollars, which account for about two-thirds of all eurocurrencies, are dollars banked outside of the United States. Other important eurocurrencies include the euro-yen, the euro-deutsche mark, the euro-franc, and the euro-pound (2016).

A Eurocurrency market is a money market that provides banking services to a variety of customers by using foreign currencies located
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Dollars deposited in Europe were increasingly lent to borrowers in Europe, and the Eurodollar market grew. The supply of Eurocurrency was increased by the US balance of trade deficit in the late 1950’s and early 1960’s, which created a flow of dollars into the hands of non-US residents. The Euromarkets were further boosted in the 1960’s and 1970’s by domestic banking restrictions, particularly in the US, resulting in:

•Increasing demand for Eurodollars from the European subsidiaries of US corporations, which were unable to borrow dollars in the US.

•Higher interest rates on Eurodollars than the domestic dollar deposits. US banks used their European branches to move dollars into the euro market, thereby circumventing restrictive US domestic banking regulations (financetrain.com, 2016)

One of the factors that make the Eurocurrency market unique compared to many other money market accounts is the fact that it is largely unregulated by government entities. Since the banks deal with a variety of currencies issued by foreign entities, it is difficult for domestic governments to intervene, particularly in the United States. With the establishment of the flexible exchange rate system in 1973, however, the U.S. Federal Reserve System was given powers to stabilize lending currencies in the event of a crisis situation. One problem that

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