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Definition and Evolution Of The Eurocurrency Markets

Describe the origins and evolution:Although the words Euro currency or Eurodollar don’t make any sense in the literal perspective, a dive into the history solves this dilemma for us. Prior to the 1950s, the English pounds (£) were used as the currency for the transaction of international trade.

The English banks used to lend the £ and accept the deposits. However, the Suez Canal crisis during 1956 put downward pressure on the £. As a result, the English banks were prohibited to lend £’s to international borrowers.

The reason for this strategy was simple. If the foreigners didn’t have any £’s, they will not be able to put pressure on the £’s by selling them. This made the banks unhappy because a very profitable business opportunity was taken away from them (MacKinnon, R. I. 1977, p. 6).

The international trade however could not stop amid this crisis. The English banks hence started accepting the deposits in US$ to finance the trade. This was the inception of the Eurocurrency market.

Eurocurrency is the word for the deposit of currency in any country other than the country of its origin. For instance, Japanese Yen in a bank in the US is Euro currency, and US$ in a bank in Japan is also an example of Eurocurrency.

It has nothing to do with the Euros (€). It is only due to the historic nature of the concept since the markets were initially located mainly in Europe.

Besides the restriction from the Bank of England at the use of sterling as the currency for international transactions and lending to foreigners, the interest rate ceiling in the United States also encouraged the depositors to move their funds to the banks offshore to facilitate from the better market interest rates.

Since the beginning of the Euro currency in the 1950s, several regulations were introduced to shape the international financing the way we see it now. During the oil crisis of 1973, the international lending became very common and frequent by the oil-importing countries(MacKinnon, R. I. 1977, p. 6).

Although the Eurocurrency market has a huge share in the international financial markets and has greater worth than orthodox commercial banking. McKinnon, however, believes that the Euro currency markets are unnecessary (1977, p. 1).

The participants in this market today use it to hedge their foreign exchange risk and other risks associated with international trade while it was originally created to finance the trade only.

This is mainly due to the profit-seeking greed which is a common by-product of the banking system. According to McKinnon, R. I. the commercial banks can easily facilitate the traders for the payments where a bank in the US will only accept the deposits in US$ and will lend in terms of US$…