Euro Dollar Market
By Euro- dollar is meant all U.S. dollar deposits in banks outside the united stated including the foreign branches of U.S banks. A euro dollar is, however, not a special type of dollar. It bears the same exchange rate as an ordinary U.S dollar has in terms of other currencies.
Euro-dollar transactions are conducted by banks not resident in the United States. For instance when an American citizen deposits (lends) his funds with a U.S. bank in London, which may again be used to make advances to a business enterprise in the U.S., then such transactions are referred to as Euro-dollar transactions. All Euro-dollar transactions are, however, unsecured credits.
Euro- dollars have come into existence on account of the Regulation issued by the Board of Governors of the U.SFederal Reserve System, which does not permit the banks to pay interest to the depositors above a certain limit. As such banks outside the United States tend to expand their dollar business by offering higher deposit rates and charging lower lending rates as compared to the banks inside the U.S increase or decrease in the potential for Euro- dollar holdings however, depend directly upon U.S defects and surpluses, respectively.
EURO – dollar market
Euro-dollar market is the creation of the international bankers. It is simply a short term money market facilitating banks borrowings and landings of U.S dollars. The euro-dollar market is principally located in drupe and basically deals in U.S dollars. But, in a wider sense, euro dollar market is confined to the external lending and borrowing of the world’s most important convertible currencies like dollar, pound, sterling, Swiss Franc, French franc, deutsche mark and Netherlands guilder.
In short, the term Euro-dollar is used as a common term to include the external markets in all the major convertible currencies.
Euro-dollar operations are unique in character since the transactions in each currency are made outside the country where that currency originates.
The euro-dollar market attracts funds by offering high rates of interest greater flexibility of maturities and a wider range of investment qualities.
Though euro-dollar market is wholly unofficial in character it has become an indispensable part of the international monetary system. It is one of the largest markets for short- term funds.
The euro- dollar market has the following characteristic.
(1) It has emerged as a truly international short- term money market.
(2) It is unofficial but profound.
(3) It is free.
(4) It is competitive.
(5) It is a more flexible capital market.
Original customers of the euro- dollar market were the business firms in Europe and the Far East which found euro- dollars cheaper way of financing their imports from the untied states. Since the lending rates of dollars in the euro dollar market were relatively less.
The euro dollar market has two faces:
(i) It is a market which accepts dollar deposits from the non- banking public and gives credit in dollars to the needy non- banking public.
(ii) It is an inter- bank market in which the commercial banks can adjust their foreign currency position through inter- bank lending and borrowings.
The existence of euro dollar market in a country however depends on the freedom given to the commercial banks to hold borrow and lend foreign currencies especially dollars and to exchange them at fixed official exchange rate.
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