EURO CURRENCY MARKET
Introduction
With the liberalization in the domestic regulations and globalization of financial markets
abroad, an increasing number of Indian companies are raising funds in international financial
markets. Typically the operations are in Eurocurrency markets, which provide larger access at
competitive cost.
Eurocurrency market is an international capital market which specialises in borrowing
and lending of currencies outside the country of issue. Thus, deposits in dollars with a bank in
London are Eurodollars. Similarly, Japanese yen held by banks in London are Euro yen: pound-
sterling held by banks in Germany is Eurosterling, and so on. They are all Eurocurrencies. The
main centres of Eurocurrency are london and a few other places in europe. The growth of the
market has extended beyond these limits and how it includes a few centres of Asia too, such as
Singapore and Hongkong.
Definition
The money market in which Eurocurrency, currency held in banks outside of the country
where it is legal tender, is borrowed and lent by banks in Europe.
The Eurocurrency market allows for more convenient borrowing, which improves
the international flow of capital for trade between countries and companies.
For example, a Japanese company borrowing U.S. dollars from a bank in France is using the
Eurocurrency market.
The market where financial banking institutions provide banking services denominated
in foreign currencies. They may accept deposits and provide loans. Unlike Eurocredit markets,
however, loans in this market are made short-term.
Features of the Market
The following are the special features of the Eurocurrency market:
1. Transactions in each currency take place outside the country of its issue.
For example, dollars earned by a Japanese firm from exports may be deposited with a bank
in London. The London bank is free to use the funds for lending to any other bank. The bank
may use it for lending to French Bank. Thus the utility of the currency is entirely outside the
control of the central bank of the country issuing the currency. For this reason,
Eurocurrencies are also referred to as offshore currencies.
2. Even though the currency is utilised outside the country of its origin, it has to be held only
in the country of its issue.
For example, the Japanese firm deposits its dollar earnings with the bank in London. The
London bank will keep the funds in a New York bank in its own name. When the London
bank lends the amount to the French bank, it will give suitable instructions to the New York
bank. On receipt of the instructions, the New York bank will debit the account of the
London bank and credit it to the account of the French bank. Thus ultimately the settlement
of all dollars transactions takes place in New York. Similarly, settlement of all Eurosterling
transactions is made in London.
3. Though Eurocurrencies are outside the direct control of the monetary authorities of their
respective countries of issue, they are subject to some form of indirect control. This is
because the settlement of all transactions has to take place only in the country of issue. If
the country of issue imposes any restrictions, the conversion of balances in the currency
held outside the country into another currency will also be effected. As already stated
conversion into another currency would involve clearing in the country of issue at some
point of transaction. This automatically subjects them to the restriction.
4. Eurocurrency market is not a foreign exchange market. It is a market for deposits with and
between banks (Inter-bank deposits) and for loans by banks to the non-bank public. It is a
market in which foreign currencies are lend and borrowed as distinct from the foreign
exchange market, where they are bought and sold. It consist of a pool of predominantly
short term deposits which provide the biggest single source of funds that commercial banks
transform into medium and occasionally log-term international loans or Euro credits.
5. The transactions in the market involve huge amounts running into millions of dollars. The
large- scale financing has led to the development of syndications of loans, where a large
number of banks participate in the lending operations.
6. Eurocurrency market is a highly competitive market with free access for new institutions in
the market. Consequently, the margin between the interest rates on deposits and advances
has narrowed down considerably.
7. A special feature is the concept of ‘floating rates of interest’. The rate of interest is linked to
a base rate, usually the London Inter-Bank Offered Rate (LIBOR). The interest on the deposit
or the advance would be reviewed periodically and changed in accordance with change, if
any, LIBOR.
8. US dollar remains the leading currency traded in the Eurocurrency market, even though its
share is declining. Other currencies traded in the market on large scale are Deutsche mark,
Japanese Yen, Pound Sterling and Swiss Franc.
9. The Eurocurrency market can broadly be divided into four segments:
i. Euro credit markets, where international group of banks engage in lending for
medium and long term;
ii. Euro bond market, where banks raise funds on behalf of international borrowers by
issuing bonds; and
iii. Eurocurrency (deposits) market, where banks accept deposits, mostly for short term;
iv. Euro notes market, where corporate raise funds.
Factors for its Emergence
a. Strict rules in the domestic market
b. Lack of Govt. controls on credit allocation & interest rates.
c. No taxes and prior commitments
d. No need to maintain Reserve Requirement
e. Operates on the basis of market forces
f. Low operating margins, high turnovers
Characteristics
i. International Money market free from govt. regulations
ii. Exist as a savings and time deposit
iii. Exists for short term which makes difficult to manage risk
iv. Participants- Govt., Public Sector Organizations
v. Euro dollar market dominates other currencies
EURO CURRENCY CENTERS
