•
A
Eurocurrency is any foreign currency denominated deposit or account at a
financial institution outside the country of the currency’s issue
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While
there are hundreds of different major interest rates around the globe, the
international financial markets focus on the interbank interest rates
The
Euro market can be loosely divided into a Euro currency market for short-term
finance and a Eurobond markets for longer-term financing.
Emergence of Euro markets:
1. During
the 1950s, the erstwhile USSR was earning dollars from the sale of gold and
other commodities and wanted to use them to buy grain and other products from
the West, mainly from the US. However, they did not want to keep these dollars
on deposit with banks in New York, as they were apprehensive that the US
government might freeze the deposits if the cold war intensified. They
approached banks in Britain and France who accepted these dollar deposits and
invested them partly in US.
2. Domestic
banks in US (as in many other countries) were subjected to reserve
requirements, which meant that a part of their deposits were locked up in
relatively low yielding assets.
3. The
importance of the dollar as a vehicle currency in international trade and
finance increased, so many European corporations had cash flows in dollars and
hence temporary dollar surpluses. Due to distance and time zone problems as
well as their greater familiarity with European banks, these companies
preferred to keep their surplus dollars in European banks, a choice made more
attractive by the higher rates offered by Euro banks.
The main factors behind the emergence and strong growth of the
Eurodollar markets were the regulations on borrowers and lenders imposed by the
US authorities which motivated both banks and borrowers to evolve Eurodollar
deposits and loans. Added to this are the considerations mentioned above, viz.
the ability of Euro banks to offer better rates both to the depositors and the
borrowers and convenience of dealing with a bank that is closer to home, who is
familiar with business culture and practices in Europe
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