Euro Dollar Market

What is euro dollar market?

It is the largest market in the international monetary system. It has a central role in the international market. Euro market deals with euro dollars. Euro dollar, refers to American dollar deposited with banks in London or Paris or Frankfurt or Amsterdam or Zurich. Euro dollar market is also known as euro currency market.

Origin and growth

It originated in 1920 The real growth began after world war two. The factors that lead to the growth are
Flow of US Aid. Cold War. Decline in the Importance of sterling. Regulation Q Other US Measures BOP Deficits in US Petro-dollars Innovative Banking

Features
1. 2. 3. 4. 5. 6. International Market Independent Market Wholesale Market Competitive Market Short-Term Market Inter-Bank Market

How does it function?

Being extensive and complex, its functions are complex. Euro bank receives deposits from:
Commercial banks or residents of US. Transfer from commercial banks or residents of other countries. Central banks.

Inflow from US can happen due to following factors:

A fall in US interest rate compared to Euro-dollar rates. An increased desire for asset diversification A fall in covered yield of foreign assets. An expected appreciation of the US dollar.

Inflow from other commercial banks are due to following factors:

Portfolio shift of domestic currency assets to US dollars. Many central bank also redeposit a substantial portion of their reserve gains in the euro market.

Euro market and Foreign exchange market

Euromarkets is closely connected to foreign exchange market because the banks are able to manage the foreign currency positions in two ways Can buy and sell currency out right in the spot and forward exchange market. They can borrow and lend currency in the interbank market.

Role in International Financial System

Core function Investing and borrowing US dollars. Increases international capital mobility by transferring funds through out the world. Helps individual banks for portfolio allocation. Provides important services to non bank private sector. Offers higher interest rates, greater flexibility of maturities, and wider range of investment qualities than other short-term capital markets. It lends money at relatively lower interest rates.

Positive effects
1. The expansion of euro-dollar market has greatly increased international capital mobility and has helped in easing the global liquidity problem. 2. It has helped in integrating international capital markets. 3. It has played an effective role in recycling funds from countries having surplus balance of payments to those having deficit balance of payment.

Positive effects
4. International flows of Euro-dollars have improved economic efficiency by reducing interest differential among nations. 5. The Euro-dollar market has also resolved the problems of countries whose policy objectives aim at controlling international capital movements by transferring dollars from and to eurobanks. 6. It has helped in financing BOP deficits and surpluses of countries through lending and borrowing dollars in exchange for other currencies from euro-dollar market.

Adverse effects
As the euro-dollar market doesnt operate under the regulations of any authority; it defeats the various inflation curbing policies. Euro-dollar market provides a enormous fund of liquid resources which are used for speculative capital movement.; which results in financial upheavals that affects even the international monetary system. Euro-dollar market has almost raised the worlds nominal money supply, thus making the world price level higher.

Role in developing countries

Developing countries have gained from the Euro-dollar market. They borrow in terms of medium-term syndicated loans. They are important source of finance for developing countries. It has helped to meet deficiencies in BOP.