Introduction
The market for Euro currency is the money market for currency outside the country where it is a legal tender. Banks, MNC's, mutual funds, and hedge funds make use of the Eurocurrency market. They want to avoid regulatory standards, tax rules, and interest rate limits that are commonly present in domestic banking.
The term Euro currency is a eurodollar generalisation, and should not be confused with the euro, the EU currency. The demand for Euro currency operates in many financial centres around the world, not only in Europe.
Understanding Eurocurrency Market
The eurocurrency market originated as a consequence of World War II when a flood of dollars was sent overseas by the Marshall Plan to rebuild Europe. The market first developed in London, as banks needed a dollar-deposit market outside the USA. The dollars held outside the United States are referred to as Eurodollars even if they are held outside Europe. They can hold them in markets, such as Singapore or the Cayman Islands.
The eurocurrency market includes other currencies, such as the Japanese yen and the British pound, each time they trade outside their home markets. The eurodollar market still remains the largest.
Important Aspects
In the Eurocurrency market, interest rates paid on deposits are typically higher than on the domestic market. This is because the depositor is not protected by the same national banking laws and has no government insurance on deposits. Tariffs on Eurocurrency loans are typically lower for essentially the same reasons than those in the domestic market. Nor Eurocurrency bank accounts are subject to the same reserve requirements as domestic accounts.
The main advantage of Euro currency markets is that they are more competitive. At the same time, they will give borrowers lower interest rates and higher interest rates for lenders. That is mostly due to less regulated Eurocurrency markets. On the downside eurocurrency markets are facing higher risks.
