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EURO CURRENCY MARKET ( EURO DOLLAR MARKET)

Q.1. What do you mean by Euro Currency Market? What are it important
features? Examine the factors which contributed to the growth of the
market OR Write a short note on Euro Currency market.
A.1. (A) MEANING:
(1) Euro dollar means all the US dollar deposits in banks located outside the US
(2) Euro currency is the currencies deposited in banks outside the countries of
their origin
(3) Euro currency includes the deposits of banks in dollar outside USA and
deposits of banks in European Currencies outside Europe.
(4) Euro dollar market / Euro currency market is mainly located in Europe and it
mainly deals in US dollars
Now, it also undertakes lending and borrowing of some other currencies like
pound (UK), Yen (Japan), DM (Germany), Swiss (Switzerland), etc, outside the
countries of their origin.

(B) FEATURES / CHARACTERISTICS:

Following are the important characteristics of the Euro Currency Market:
(1) International Market under no National Control:
- This market is not under the control of any country. So, it is a free market
- The dollar deposits in London are outside the control of United States,
because they are in London. Similarly they are outside the control of UK
because they are in dollars.
(2) Unofficial Market: It is an unofficial market. But, even then it is indispensable
part of the international monetary system.
(3) Short Term Money Market: The deposits of this market are for a period of
one day to one year. (They have maturity of less than one year or sometime
above one year.) Thus, it is a short term money market.
(4) Wholesale Market: Euro Currency Market is a wholesale market, because the
size of individual transaction is usually above $ 1 billion.
(5) Highly Competitive and sensible Market: This market is highly competitive
and sensitive. It attracts funds by offering high rate of interest and more
flexibility in maturity. Further, its lending rates are relatively lower.

(C) FACTORS THAT CONTRIBUTED TO GROWTH OF EURO-CURRENCY MARKET:

Following are the important factors, which are responsible (have contributed to)
for the growth of Euro-Currency Market:
(1) The Suez Crisis: During the Suez Crisis in 1957, the British Banks were in
search of alternative currencies. In this time, they got a large pool of U.S.
dollars from the residents outside US. This provided a stimulus for the growth
of Euro Dollar Market.
(2) Relaxation of Exchange Controls & Resumption of Currency Convertibility:
The general relaxation of exchange controls, the stability in the exchange
market and the resumption of currency convertibility in Western Europe also
led to the growth of Euro Currency Market
In convertible currency system there was surplus in some countries and deficit
in other countries Due to higher rate of interest there was flow of surplus
dollars from surplus countries to Euro Market and also flow of dollars from
Euro Market to deficit countries. So there was growth of Euro Currency
Market.

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(3) Political Factor: Due to cold war between the United States and the
Communist countries (Russia) the Russian and East European banks started
depositing their dollar balances with European banks (British & French Banks)
(rather than in United States.) This also led to the growth of Euro market.
(4) Balance of Payments Deficit of the U.S.: Since 1950 there was large and
persistent (continuous) deficit in Balance of Payments of the US. So there was
an increase in flow of the US Dollars to those countries who had surplus
with the US. This was also responsible for the rapid growth of Euro Market.
(5) The Regulation Q: The Federal Reserve System, by its regulations like
Regulation- Q fixed the maximum limit on the rate of interest payable by the
banks in the US. It also prohibited payment of interest on deposits for less
than 30 days. On the other hand, in Euro market rates of interest were higher
than the deposit rates in the US.
Further the Euro Dollar Market paid interest also on the deposits for less than
30 days. This led to the growth of Euro Market.
(6) Innovative Banking: The innovative banking by the American brinks in
Europe and their willingness to operate in euro dollar also encouraged the
growth of the Euro Market.
(7) Supply of Petro dollars: Since 1973, due to considerable rise in oil prices,
there was a tremendous increase in the oil revenue of OPEC. (Oil Producing
& Exporting Countries). So, there was increase in the flow of petro dollars to
Euro Market. This was also one of the reasons for the growth of Euro Market.
(8) The Participants: There are large number of participants in the Euro Currency
business & they include business corporate, Govt. of various nations, international
organizations, Central banks, commercial banks, MNCs, traders, individuals etc.
(9) Supply & Demand: There has been increase in supply of funds from various
participants like Central banks, OPEC, MNC’s, etc. Similarly, there is also
increase in demand for Euro Currencies from the trade deficit countries.

(D) EVALUATION OF THE EURO CURRENCY MARKET:

 Advantages:
(1) The Euro currency market has increased the strength of international liquidity
position.
(2) It has provided credit for financing the temporary deficits in the BOP.
(3) It has given credit to exporters and importers.
(4) It helps to meet short term financial requirements of business corporations.
(5) It has provided markets for profitable investment of funds by central banks.
(6) It has helped the commercial banks of some countries to expand credit
creation and helped in “window dressing”.
(7) It has encouraged economic development of certain countries like South Korea,
Brazil, Taiwan and Mexico.
 Disadvantages:
(1) The growth of euro currency market has given rise to some serious problems
in the field of monetary stability and banking discipline.
(2) It has given opportunity, to its participants, to avoid the financial regulations
of national money markets.
(3) It has resulted into increase in world money supply (in terms of dollars) and
raised world price level
So it is a question whether it is tonic or slow poison for world economy
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