1.

Meaning of Euro Currency Market:

Euro-currency is a currency held by individuals and institutions in a
European country other than its country of origin. It is accumulated in
European banks that deal in other currencies such as American dollar,
Japanese Yen, Swiss Francs, etc.

This market is the largest market in the international monetary system.

It has been playing a central role in short and medium term
international borrowing and lending by large corporations and banks
and for financing international trade.

2. Origin and Growth of Euro Currency Market:

The origin of the Euro-currency market can be traced back to the
1920s when the US dollars were deposited in the European banks
which converted them into their local currencies for lending purposes.
But the real growth of the Euro-currency market began after the
Second World War.

The following factors led to its growth:

1. Flow of US Aid:
The United States emerged as the most powerful nation in the post-
war period which spent huge sums of money on the rehabilitation of
Europe both in terms of economic and military aid. This led to the
transfer of a large number of dollars in Euro-banks.

3. Decline in the Importance of Sterling:

In the post-war period Britain emerged as a debtor country.
Consequently, the British sterling which had dominated the
international financial market in the pre-war era gave place to the
dollar in the post-war period. 

2. Cold War:
The cold war which started in the 1950s led the Soviet Union and the
East European government to transfer their dollar deposits from
America to Euro-banks for fear that they might be blocked by the
American Government.
4. Regulation-Q:
Regulation-Q of the US Federal Reserve System had been a major
factor which gave rise to the Euro-currency market in the late 1960s.
Under Regulation-Q, a ceiling was imposed on the interest rate
payable on time deposits with the US banks and it prohibited the
payment of any interest at all on deposits up to 30 days.

This encouraged the US banks to open branches in Europe and

attract dollar deposits to be used for financing international trade. In
particular, this happened in 1968 and 1969 and again from 1979
onwards when the Regulation-Q ceiling kept low interest rates on time
deposits.

Features of Euro-Currency Market:

The Euro-currency market has the following features:
1. International Market:
The Euro-currency market is an international market which accepts
deposits and gives credit in currencies from throughout the world.

2. Independent Market:
It is a free and independent market which does not function under the
control of any monetary authority or government.

3. Wholesale Market:
It is a wholesale market in which different currencies are bought and
sold usually above $ 1 million.

4. Competitive Market:
It is a highly competitive market in which the supply and demand for
currencies depends on interest rate changes of Euro-banks.

5. Short-Term Market:
It is a short-term money market in which deposits in different
currencies are usually accepted for a period ranging from a few days
to a year and interest is paid on them.

6. Inter-Bank Market:
It is an inter-bank market in which the Euro-banks borrow and lend
dollars and other Euro-currencies from each other.

Role of Euro Currency Market in International Financial

System:
The Euro-currency market has been playing an important role in
international financial system. Investing and borrowing US dollars is
the core function of the Euro-currency market. It transfers short and
medium terms funds throughout the world, thereby increasing
international capital mobility. It not only enables individual banks to
improve their portfolio allocation, but also provides important services
to the non-bank private sector.

The Euro-currency market attracts funds because it offers higher

interest rates, greater flexibility of maturities, and a wider range of
investment qualities than other short-term capital markets. It attracts
borrowers because it lends funds at relatively low interest rates.

It is competitive in the interest rates it charges and receives, both

because of the economies of scale afforded by concentrating on
wholesale transactions, and because the Euro-banks are not subject
to the regulations which tend to raise costs in domestic banking.
Commercial banks, central banks, government treasuries,
international banks like the Bank of International Settlement, and
multinational corporations are the borrowers and lenders in the Euro-
currency market.