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Topic Euro Currency Market Index 1.

Euro Introduction


€2 €5.europa. Cyprus. the euro has the highest combined value of banknotes and coins in circulation in the world. 978) European Central Bank www. more than 175 million people worldwide—including 150 million people in Africa—use currencies pegged to the euro. 20c.6038 on 18 July 2008. Euro ευρώ (Greek) ISO 4217 code Central bank Website Official user(s) Unofficial user(s) Inflation Method Pegged by Symbol Nickname Plural Coins €1 coin EUR (num. Slovenia. Additionally.4%. €100. the euro has been immersed in the European sovereign-debt crisis which has led to the creation of the European Financial Stability Facility as well as other reforms aimed at stabilizing the currency. having surpassed the US dollar. peaking at US$1. Belgium. The currency is also used in a further five European countries and consequently used daily by some 332 million Europeans. replacing the former European Currency Unit (ECU) at a ratio of 1:1 (US$1. Estonia. 50c. Germany. Ireland. Slovakia. 10c.ecb. €50. code: EUR) is the currency used by the Institutions of the European Union and is the official currency of the eurozone. €20. Malta. which consists of 17 of the 27 member states of the European Union: Austria. the euro fell below US$1. Portugal. the euro zone is the second largest economy in the world. Luxembourg. December 2012 HICP 10 currencies € The single currency Euro linguistic issues 1c. Greece. Finland. following concerns raised over Greek debt and Spain's troubled banking sector. €500 The name euro was officially adopted on 16 December 1995. €1. France. The euro was introduced to Banknotes world financial markets as an accounting currency on 1 January 1999. 5c. Italy. Euro coins and banknotes entered circulation on 1 January 2002. Since late 2009. 2 . Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies. While the euro dropped subsequently to US$0. and Spain.21 for the first time in two years. In July 2012. €10. The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. €200. with more than €915 billion in circulation. As of September 2012. the Netherlands.1743).8252 within two years (26 October 2000).EURO INTRODUCTION The euro (sign: €. 2c.eu Eurozone (17) Outside the EU (7) 4 other users 1. it has traded above the US dollar since the end of 2002.

In 1999 the currency was born virtually and in 2002 notes and coins began to circulate. 1999. the Maastricht Treaty entered into force in 1993 with the goal of creating economic and monetary union by 1999 for all EU states except the UK and Denmark (even though Denmark has a fixed exchange rate policy with the euro). INTRODUCTION TO EUROCURRENCY MARKET It is a market for Borrowing and Lending of currency at the center outside the country in which the currency is issued. For example: a deposit denominated in US dollars residing in a Japanese bank is a Eurocurrency deposit. Euro is administered by the European Central Bank. the Euro Group. Euro (€) is a single currency which was launched on 1st Jan. The Euro is an important international reserve currency. or more specifically a Eurodollar deposit.The Euro is administered by the European Central Bank (ECB) based in 3 . replacing the former European Currency Unit (ECU) at a ratio of 1:1. wherein the currency is bought and sold. It rapidly took over from the former national currencies and slowly expanded behind the rest of the EU. alongside the European Central Bank. After tough negotiations. WHAT IS EUROCURRENCY MARKET? Eurocurrency is money in the form of bank deposits of a currency outside the country that issued the currency. It is a market for borrowing and lending of currency at the center outside the country. Euros have surpassed the US dollar with the highest combined value of cash in circulation in the world. Eurocurrency is the term used to describe deposits residing in banks that are located outside the borders of the country that issues the currency the deposit is denominated in.The currency was introduced initially in non-physical forms. It is different than the Foreign Exchange Market. In 2009 the Lisbon Treaty formalized its political authority.Now Euro (€) is the official currency of 16 of the 27 member states of the European Union (EU). The euro was introduced to world financial markets as an accounting currency on 1 January 1999. 1999. such as travelers’ checks and electronic bank in Euro coins and bank notes entered circulation on 1 January 2002. Euro is a single currency which was launched on 1st Jan. The name euro was officially adopted on 16 December 1995. It is an important international reserve currency. although it had been a goal of the European Union (EU) and its predecessors since the 1960s. Eurodollar or Eurocurrency refers to bank time deposits in a foreign currency. This currency is used daily by some 327 million Europeans. particularly due to opposition from the United Kingdom. (With 11 of 15 member countries of the European Union participating in the experiment).These 16 states include some of the most technologically advanced countries of the European continent and are collectively known as the Euro zone.ORIGIN OF EURO The euro came into existence on 1 January 1999.

Finland. For example. no cost of hedging against it  No transaction costs  Increased transparency and fewer transactions for importers and exporters  Increased liquidity in the ‘United Euro’ financial market Definition The money market in which Eurocurrency. The Eurocurrency market allows for more convenient borrowing. and the Euro system.Frankfurt. known collectively as the Eurozone are Austria. Over 175 million people worldwide use currencies which are pegged to the euro. Italy. Greece. They may accept deposits and provide loans. with and without formal agreements. it is considered to be operating under the auspices of the Eurocurrency Market. 4 . Malt a. the Eurocurrency Market represents any deposit of foreign currencies into a domestic bank. tax laws and interest rate caps that are often present in domestic banking. The most important implications of having a common currency. loans in this market are made short-term. Portugal. The money market in which Eurocurrency. therefore.S. HISTORY A Eurocurrency Market is a money market that provides banking services to a variety of customers by using foreign currencies located outside of the domestic marketplace. the Netherlands. Instead. a Japanese company borrowing U. is borrowed and lent by banks in Europe. Luxembourg. including more than 150 million people in Africa. is borrowed and lent by banks in Europe. Unlike Euro credit markets. The states. Cyprus. the Euro. currency held in banks outside of the country where it is legal tender. comprising of the various central banks of the Euro zone nations. are:  Exchange rate certainty while travelling across Europe  No exchange risk and. particularly in the United States. which improves the international flow of capital for trade between countries and companies. dollars from a bank in France is using the Eurocurrency market. currency held in banks outside of the country where it is legal tender. however. Slovakia. The concept does not have anything to do with the European Union or the banks associated with the member countries. The market where financial banking institutions provide banking services denominated in foreign currencies. Ireland. The currency is also used in a further five European countries. if Japanese yen is deposited into a bank in the United States. Slovenia and Spain. Germany. The Eurocurrency market is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements. For example. Belgium. and is consequently used daily by some 327 million Europeans. although the origins of the concept are heavily derived from the region. France.

an American dollar in Vietnam is worth more than it is in Canada. as they were apprehensive that the US government might freeze the deposits if the cold war intensified. This adds to the volatility of the Eurocurrency Market. further influencing the market. With no friendly government operations within the European marketplace. Emergence of Euro markets: 1. 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 who motivated both banks and borrowers to evolve Eurodollar deposits and loans Added to this are the considerations 5 . especially due to the fact that many American companies were tied to the well-being of business behind enemy lines. with the establishment of the flexible exchange rate system in 1973. 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.S. Due to distance and time zone problems as well as their greater familiarity with European banks. Despite its name. The importance of the dollar as a vehicle currency in international trade and finance increased. The challenge with foreign banks revolves around the fact that regulations enforced by the Federal Reserve are really only enforceable within the U. The taxation level and exchange rate of the American dollar varies depending on the nation. Nearly two-thirds of all assets around the globe are represented by U. Since the banks deal with a variety of currencies issued by foreign entities. the Federal Reserve System was given powers to stabilize lending currencies in the event of a crisis situation. While the war was going on. these companies preferred to keep their surplus dollars in European banks. political challenges caused by the takeover of the continent by the Axis Powers meant that there was a limited marketplace for trading in foreign currency. During the 1950s. particularly in the United States. so many European corporations had cash flows in dollars and hence temporary dollar surpluses. the Eurocurrency Market is primarily influenced by the value of the American dollar. creating a new money market. currency. the traditional economies of the nations were displaced. But one problem that arises is that these crises are not defined by the regulations. banks across the world began to deposit large sums of foreign currency. along with the currencies. it is difficult for domestic governments to intervene. 2. Domestic banks in US (as in many other countries) were subjected to reserve requirements. 3. mainly from the US. To combat this. They approached banks in Britain and France who accepted these dollar deposits and invested them partly in US. One of the factors that make the Eurocurrency Market unique compared to many other money market accounts is the fact that it is largely unregulated by government entities.S. which meant that a part of their deposits were locked up in relatively low yielding assets. However. they did not want to keep these dollars on deposit with banks in New York. For example. a choice made more attractive by the higher rates offered by Euro banks. meaning that intervention must be established based on each case and the Federal Reserve must work directly with central banks around the world to resolve the matter. However.The Eurocurrency Market has its roots in the World War II era.

expanded to a number of other Features of the Market The following are the special features of the Eurocurrency market: 1. The London bank will keep the funds in a New York bank in its own name. U. By diverting dollar deposits to their offshore branches or subsidiaries. so they put their dollar earnings on deposit in London. the New York bank will debit the account of the London bank and credit it to the account of the French bank. For example. it has to be held only in the country of its issue.balance of payments pressures made the United Kingdom government limit British banks’ external use of sterling. their foreign branches-which were not subject to the VFCR. (2). General controls on the movement of capital also helped to boost the Eurocurrency markets. For example. One example was the introduction. Transactions in each currency take place outside the country of its issue.took deposits and on lent them outside the ceiling. it will give suitable instructions to the New York bank. of the Voluntary Foreign Credit Restraint Program (VFCR) in the United States. On receipt of the instructions. 2. Thus the utility of the currency is entirely outside the control of the central bank of the country issuing the currency. Gradually other European dollar holders did the same.mentioned above. which had been located in Western Europe (and centered in London). Regulation Q put a ceiling on the interest rates that banks operating in the United States could offer to domestic depositors were naturally attracted to Euro banks that were not bound by Regulation Q.S. banks. the Japanese firm deposits its dollar earnings with the bank in London. For this reason. The bank may use it for lending to French Bank. The growth of the Eurocurrency market was also stimulated by certain monetary regulations in the United States. Between 1964 and 1973 the number of U. The number of branches increased from 181 to 699 over the same period. The London bank is free to use the funds for lending to any other bank. When the London bank lends the amount to the French bank. banks were able to avoid tying up so much of their funds in reserve requirements at a zero rate. Thus 6 . in 1965. banks in the United States were required to hold noninterest-bearing reserves. The new freedom produced a surge of international banking business. 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. a tendency that was particularly marked when the United States ran large balance of payments deficits. Even though the currency is utilized outside the country of its origin. banks with overseas branches increased from 11 to 125. (3).the centrally planned economies were reluctant to hold bank deposits in the United States.S. dollars earned by a Japanese firm from exports may be deposited with a bank in London.S. which is familiar with business culture and practices in Europe. Instead. At the end of the 1960s and during the early 1970s the Eurocurrency markets. In addition. Euro currencies are also referred to as offshore currencies. For instance. Several factors were behind their birth: (1). by the end of 1958 the main industrial countries had restored full convertibility of their currencies. The origin of the Eurocurrency market is that the market in currency trading outside their respective domestic economy. so they had a strong incentive to develop business in foreign currencies. The specific goal of the VFCR was to limit the growth of foreign lending by U. viz.

Lack of Govt. Though Eurocurrencies are outside the direct control of the monetary authorities of the irrespective countries of issue. Eurocurrency (deposits) market. usually the London Inter-Bank Offered Rate (LIBOR). This automatically subjects them to the restriction. c. mostly for short term. US dollar remains the leading currency traded in the Eurocurrency market. Eurocurrency market is not a foreign exchange market. This is because the settlement of all transactions has to take place only in the country of issue. ultimately the settlement of all dollars transactions takes place in New York. where banks raise funds on behalf of international borrowers by issuing bonds. controls on credit allocation & interest rates. where they are bought and sold. Eurocurrency market is a highly competitive market with free access for new institutions in the market. Japanese Yen. 7. If the country of issue imposes any restrictions. Euro notes market. where banks accept deposits. where a large number of banks participate in the lending operations. even though its share is declining. 8. Euro credit markets. Low operating margins. LIBOR. The transactions in the market involve huge amounts running into millions of dollars. Other currencies traded in the market on large scale are Deutsche mark. 9. The Eurocurrency market can broadly be divided into four segments: i. No taxes and prior commitments d. settlement of all Euro sterling transactions is made in London. 4. It is a market in which foreign currencies are lend and borrowed as distinct from the foreign exchange market. iv.3. Euro bond market. A special feature is the concept of ‘floating rates of interest’. 6. high turnovers Characteristics 7 . 5. where corporate raise funds Factors for its Emergence a. No need to maintain Reserve Requirement e. the conversion of balances in the currency held outside the country into another currency will also be effected. they are subject to some form of indirect control. the margin between the interest rates on deposits and advances has narrowed down considerably. The interest on the depositor the advance would be reviewed periodically and changed in accordance with change. and iii. Pound Sterling and Swiss Franc.scale financing has led to the development of syndications of loans. Strict rules in the domestic market b. if any. Operates on the basis of market forces f. It is a market for deposits with and between banks (Inter-bank deposits) and for loans by banks to the non-bank public. 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. Similarly. where international group of banks engage in lending for medium and long term. The rate of interest is linked to a base rate. As already stated conversion into another currency would involve clearing in the country of issue at some point of transaction. Consequently. ii. The large.

where large numbers of banks participate in the lending operations.The rate of interest on advances and deposits is reviewed periodically and amended according to changed circumstances. 2.However other currencies are now emerging thus reducing the role of dollar somewhat (about 80% market share) 8 .e. keeps this USD in London Bank (say AMEX) as Deposit. iv. There is free access to the new institutions in the market.Nigerian Importer avails loan in INR from Russia to import machinery from India. earning Japanese Yen. regulations Exist as a savings and time deposit Exists for short term which makes difficult to manage risk Participants.i. This has lead to Syndication of loans. Floating rates of interest based on LIBOR: The rate of interest in the market is linked to the Base Rate usually LIBOR. i. AMEX bank may use such deposits for lending to a French Importer. i. International Money market free from govt. investors and borrowers derive advantage out of this situation. Types of transactions Control of the country of issue of the currency Huge amounts of transactions Highly competitive Market Floating rates of interest based on LIBOR Dominance of Dollar denominated transactions Four different segments Types of transactions: Japanese Exporter.. which provides the biggest single source of funds for commercial banks. Highly competitive Market: There are no entry barriers. 3. Public Sector Organizations Euro dollar market dominates other currencies FEATURES EURO CURRENCY MARKET: 1.e. Consumers. London InterBank Offered Rate . Huge amounts of transactions: Generally they are in only millions of USD. 6. It also consists of pool of large number of short term deposits. thus allowing a wafer thin margin for operations. iii. Indian exporter. if any in LIBOR Dominance of Dollar denominated transactions: Dollar is a leading currency traded in the market (about 90% to 95% market share). 7. 4.Govt. 5. v. ii. The lending rates are low and deposit rate are high. keeps these Yen in Korea as Deposit . earning USD.

COUNTRIES RESPONSIBLE FOR THE GROWTH OF THE EURO-CURRENCY MARKET China (fear that its Fx in USD would be blocked). the stability of the exchange market and the redemption of the currency convertibility in Western Europe in 1958 provided an added impetus to the growth of the euro market. Amount: It is a wholesale sector of the international capital market. federal Reserve Act. The cold war between the United States and the communist countries also contributed to the euro currency market. Regulation of ‘Q’ which fixed the maximum rate of interest payable to the banks in US and the prohibition of payment of interest on deposit for less than 30 days very significantly contributed to the fast growth of the euro market. and UK (policy of not granting sterling loan outside sterling area in1957). USA (indeed blocked identifiable Fx in USD in 1950. Balance of payment deficit of the US. 9 . and introduction of interest equalization tax in 1963). 2. Innovative banking. Euro  Japanese Yen  Pound Sterling FACTORS CONTRIBUTED TO THE GROWTH OF EURO CURRENCY 1. Segment 1: Euro-Credit Markets Tenure: Medium and Long Term Loans [up to 10--15 years 10% of loans. Relaxation of exchange control and resumption of currency convertibility. 5²8 years 85% of loans. 4. Korea (War broke out in 1950). 5. The Political Factors. control and restrictions on borrowing funds in US in 1965. 6. regulation ‘Q’ and ’M’. The advent of the Innovative banking spearheaded by the US banks in Europe and the willingness of the banks in the market to operate on a narrow basis also encouraged the growth of euro market. Russia (erstwhile USSR) {because of their banking presence in Paris and London}. 1± 5 years 5% of loans] provided by group of banks. Supply of petrodollars. The flow of petro dollar facilitated by the increase in the OPEC’S oil revenue following by the oil price hike since 1973 has been a significant source of growth of Euro Currency. The regulation of ‘Q’. Deficit in the balance of payment in US meant an increasing flow of US dollar to those countries which had a surplus with the US. 3. 1. The general relaxation of exchange control.

Currency: Generally USD.  Selling of EB is through syndicates of the banks  Lead manager advises about size. generally who takes the largest share of lending Agent bank.000 Average maturity of the Euro-Bond is 5 to 6 years In some cases maturity extends to 15 years 10 . Syndication of Loan:       Managing banks. but can be any other currency. Type of loan: A) Revolving [like cash credit]B) Term Credit 4. underwriting commission and selling commission is somewhere between 2% and 2. as required by the borrower and ability of the lender. terms and timing of the issue  Entire issue is underwritten  Lead manager’s fees. Interest Rate: Generally 1% above the reference rate. as required to take interest of the banks in syndication andcomply with the procedure Common assessment of the borrower and his country Common documentation In very few cases co-financing with IMF or IBRD is possible Segment 2: Euro-Bonds  Euro-Bonds are unsecured securities  They are therefore issued by borrowers of high financial standing  When they are issued by government corporation or local bodies. Credit rating is the essence of lending 3. rolled over every six moths 5. The investors are spread worldwide  However foreign bonds are issued in only one country and are subject to the regulation of the country of issue.2. Security: Loans are provided without any primary or collateral security. as desired by the borrower Lead bank.5% of the value of the issue  Lead manager allocates the bonds to all members of the selling group at face valueless their commission  Thereafter every member is on his own  They can sell to investors at whatever price they can obtain  Thus no two investors in the Euro-Bond market need pay the same price for the newly issued bonds Features of Euro-Bonds:     Most Euro-Bonds are bearer securities Most bonds are denominated in USD 10. they are guaranteed by the government of the country concerned  Euro-Bond is outside the regulation of a single country.

3. 11 . 3. This provides an opportunity to diversify the currency risk as these bonds are issued with fixed exchange rate of conversion. 3. 4.Types of Euro-Bonds: 1. 4. The investor can keep the bond and trade the warrant for shares. Rate of interest is adjusted every six months Minimum interest rate clause may be included ‘Drop lock’ clause may also be included. 2. 7. which means if minimum interest rate happens to be paid then it is locked for the remaining period of the bond. Bonds with warrants: warrant is part of the bond but is detachable and traded separately... 2. Exchange Rate is either fixed (generally not) or is spot rate prevailing in the market three business days before the due date of payment of interest and principal Floating Rate Notes 1. Currency Option Bonds 1. 5. 4.. 5..5%. 1. 6. when the conversion takes place. Straight or Fixed Rate Bonds Convertible Bonds Currency Option Bonds Floating Rate Notes Straight or Fixed Rate Bonds 1. Sometimes the bonds are issued in a currency other than the currency of the share. 3. These are fixed interest bearing securities Interest is normally payable yearly Year is considered of 360 days Maturities range from 3 years to 25 years Right of redemption before maturity may be there or may not be there If the right of redemption is there then redemption is done by offering an agio (premium) Convertible Bonds 1. 6. 2.. They are similar to straight bonds 2.. Generally issued in one currency and option to take interest and principal in another currency.. 5. 2. %. The rate of interest is lower than the rate of interest on comparable straight bond. These are fixed interest bearing securities Investor has an option to convert bonds into equity shares of the borrowing company The conversion is done at the stipulated price and during the stipulated period Conversion price is normally kept higher than the market price. 4. 3. FRN is similar to straight bonds with respect to maturity and denomination Rate of interest however varies and is based on LIBOR + 1/8%.

Sterling pounds.3. two days or seven days notice) for USD. Euro-bonds represent the funds amassed by the bank on behalf of international borrower.6 and 12 months for all currencies 6. Canadian dollars and Japanese Yen. Interest Rate: 1/8 % below LIBOR 7. Euro-currency deposits represent the funds accepted by the bank themselves. Minimum amount: USD50. as well as currency cocktails (SDR. 3. but interest rate works out lesser than that is paid on bank borrowing and higher than that is paid by the bank on deposits 12 . 2.000 5. Generally it is found that banks issue and invest in FRNs Segment 3: Euro-Currency Deposits 1. Amount: USD 100. Discount CD: they are issued at discount Segment 4: Euro-Notes Market 1. The deposits are placed at call (overnight. Generally issue is not underwritten 3. 5. Period: 1 year (1 month through 12 months) 4.) 4.000 or equivalent 4. Currencies: USD. The deposits are accepted in Euro-currencies. Tranche CD: carries different rates of interest for each tranche 8. 4. Time deposits are accepted for periods of 1. They are bearer instrument and can be traded in the secondary market 3.000 or its equivalent Euro-Currency Deposits Certificate of Deposit 1. The instruments issue may be underwritten or may not be underwritten 3. generally the period varies between 90 days to 180 days 2.6. Issued on µDiscount to Yield µ basis.ECU etc. Sterling Pound. and of two days in any other currencies. Minimum size of deposit is USD50. The Euro-currency market consists of all deposits of currencies placed with the banks outside their home currency. Yen 6. It is negotiable instrument 2. This market constitutes the instruments of borrowing issued by the corporate in the Euro-currency market 2. USD and Sterling pound can be placed for a period of five years 7. The borrowers directly approach the lenders without the intermediation of the banks or financial institution. Instruments are of the following categories:  Commercial Paper  Note issuance Facilities  Medium Term Notes Commercial Paper 1. It is a promissory note with maturity less than a year.

Portugal.  It can be comparable with Euro-bonds with a difference that Eurobonds issue is underwritten. used by more than 320million Europeans in twenty-two countries. A one-euro coin is shown. The banks underwrite at the time of issue as well as when the notes are rolled over 3. Italy. the euro is one of the world's most powerful currencies. Non Underwritten and fixed interest rate source of raising finance. Luxembourg. Ireland. Euro Countries Today.  Their maturity is somewhere between short term CPs(less than one year) and long term Euro bonds (more than five years)  They are privately placed and have great flexibility COUNTRIES USING EURO CURRENCY On January 1. France. the letter "E" with one or two cross lines. Belgium. The countries currently using the euro are: 1) Andorra 2) Austria 3) Belgium 4) Cyprus 5) Estonia 6) Finland 7) France 8) Germany 9) Greece 13 . They are unsecured instrument Note Issuance Facilities (NIF) 1.5. The euro is used throughout Europe as an international currency. Borrowers place short term notes of 3 months to 6 months maturity directly with the investors and the notes are rolled over on maturity 2. Netherlands. 2002. and Spain). The symbol of the euro is ¼. where as MYN issue is not underwritten. With slight variation they are also known as:  Revolving underwriting facility (RUF)  Standby Note Issuance Facility (SNIF)  Note Purchase Facility (NPF) Medium Term Notes  MTN represents Long Term.However. 1999 one of the largest steps toward European unification took place with the introduction of the euro as the official currency in eleven countries (Austria. Germany. residents of the first European Union countries that adopted the euro didn't begin using euro banknotes and coins until January 1. Finland.

the United Kingdom. 1999 the introduction of the Euro as an electronic currency was made. Euros are divided into eurocents. Only the Greece currency was not converted at this time. Only 17 of the 27members of the European Union (EU) are part of the Eurozone. Andorra. 14 . all of the Euro crosses are characterized by great liquidity. 2009. Other new EU member countries are working toward becoming part of the Eurozone. each eurocent being one one-hundredth of a euro. On the other hand. and Sweden have thus far decided not to convert to the euro.€ The symbol for the euro is a rounded "E" with one or two cross lines . Additionally. San Marino. Slovakia started using the euro.¼. Notably. market participants don't have background information regarding the way it will act under different market conditions. Estonia began using the euro on January1. which is viewed as an untested financial institution. and the Vatican City are not EU members but do officially use the euro as their currencies. but instead in January 2001. The relatively new nature of the Euro has attached to it some risks that cannot be found in other currencies. The risks come from the fact that the ECB has a short history and has not yet proven its efficacy and efficiency. The EUR/USD currency pair is the most liquid one among all others. Monaco. Denmark. The Euro . Since the bank has no long history. Kosovo.10) Ireland 11) Italy 12) Kosovo 13) Luxembourg 14) Malta 15) Monaco 16) Montenegro 17) Netherlands 18) Portugal 19) San Marino 20) Slovakia 21) Slovenia 22) Spain 23) Vatican City On January 1. the name for the collection of EU countries that utilize the euro. Montenegro. One of them stems from the ECB. In January 1. EURO (EUR) CURRENCY TRAITS The Euro enjoys high liquidity. This is the time when the pre-EMU currencies were replaced by the Euro. Lithuania and Latvia are expected to join the Eurozone in the next few years and thus become countries using the euro. 2011.

the Euro are:      Exchange rate certainty while travelling across Europe No exchange risk and. investors divert their attention from the European assets. because investors are attracted by the high yields of assets. no cost of hedging against it No transaction costs Increased transparency and fewer transactions for importers and exporters Increased liquidity in the ‘United Euro’ financial market The Asia Currency Market: Although dwarfed by its European counterpart. if the spread widens it may indicate the increase in the value of the EUR. The most important implications of having a common currency. The Euro value is said to be increasing if the Bund rates are greater than the treasury rates and an increase in the differential is observed. Euro movements can be indicated by the differential between the 10-year US government bond and the 10-year German Bund. This risk stems from the fact that the Euro is the official currency of 12member states and a change in any one country is reflected in its value. circulating in Asia. the Asia currency (or Asia dollar) market has been growing rapidly in terms of both size and range of services provided. This is generally so. The Euro sentiment is indicated by the spread between US Treasuries and Bunds. Alternatively. mainly U. In order to gauge any potential euro exchange rate changes. 15 . investors tend to direct their assets to European fixed income assets. the value of the EUR is decreasing if the differential falls or a tightening of the spread is observed. the Asia dollar market was founded in1968 as a satellite market to channel to and from the Euro dollar market the large pool of offshore funds. On the other hand. if this spread decreases. The movements in the EUR/USD are also influenced by the made Mergers and Acquisitions (M&A). the ten-year government bonds should be referred to. Eurodollars represent deposits that are placed outside the US and are held in US dollars.Another risk associated with the Euro concerns its susceptibility to political and economic uncertainties. The M&A activity has significantly increased among the EU and the US. which has led to an impact on the value of the EUR on short term basis. When the spread between the Euribors and the Eurodollar future increase. Located in Singapore because of the lack of restrictive financial controls and taxes there. The Eurodollar futures rate and the Euribor futures rate tend to be compared by forex market participants.S. This will eventually result in a decrease in the money flows into the EUR. The Euribor Rate The Euribor rate (also known as the Euro interbank offer rate or the 3-Month Interest Rate) represents the interest rate at which large banks offer to one another interbank term deposits. Additionally. therefore. dollars.

S.investopedia. But the advantages and disadvantages associated with the Eurocurrency Market have given rise to the doubt whether it is a welcome tonic or a slow poison to the international system. BIBLIOGRAPHY http://www.Its primary economic functions these days are to channel investment dollars to a number of rapidly growing Southeast Asian countries and to provide deposit facilities for those investors with excess funds. Bank Loans to financial and nonfinancial entities Liabilities Deposits of financial and nonfinancial entities Call Money Certificates of deposit Floating Rate Notes AN EVALUATION OF EURODOLLAR MARKET Advantages     Increases international liquidity Expands domestic credit creation Act as a ‘Vehicle Currency’ for carrying world trade Globalization increases its importance Disadvantages  Affects international monetary stability CONCLUSION   The development of the International monetary system and foreign exchange market has been significantly influenced by the growth of Eurocurrency Market. Balance Sheet of Eurobanks Assets Deposits in other Euro banks Working balance in U.asp#ixzz2KWgJVm7I 16 .com/terms/e/eurocurrencymarket.

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