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    Reasons For Growth of Eurocurrency Market

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    Anushka Kharat
    The eurocurrency market grew for several reasons: 1. Regulations imposed by the U.S. Federal Reserve, such as limits on interest rates and reserve requirements, encouraged European banks to attract U.S. dollar deposits by offering higher rates. 2. Factors like the Interest Equalization Tax and restrictions on outbound investments from the U.S. pushed non-U.S. entities to borrow in the offshore eurocurrency market. 3. The eurocurrency market was more flexible and convenient for non-U.S. entities and multinational corporations to deposit and borrow foreign currencies without currency conversion costs or exchange rate risks.

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    Reasons For Growth of Eurocurrency Market

    Uploaded by

    Anushka Kharat
    82 views8 pages
    The eurocurrency market grew for several reasons: 1. Regulations imposed by the U.S. Federal Reserve, such as limits on interest rates and reserve requirements, encouraged European banks to attract U.S. dollar deposits by offering higher rates. 2. Factors like the Interest Equalization Tax and restrictions on outbound investments from the U.S. pushed non-U.S. entities to borrow in the offshore eurocurrency market. 3. The eurocurrency market was more flexible and convenient for non-U.S. entities and multinational corporations to deposit and borrow foreign currencies without currency conversion costs or exchange rate risks.

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    The eurocurrency market grew for several reasons: 1. Regulations imposed by the U.S. Federal Reserve, such as limits on interest rates and reserve requirements, encouraged European banks to attract U.S. dollar deposits by offering higher rates. 2. Factors like the Interest Equalization Tax and restrictions on outbound investments from the U.S. pushed non-U.S. entities to borrow in the offshore eurocurrency market. 3. The eurocurrency market was more flexible and convenient for non-U.S. entities and multinational corporations to deposit and borrow foreign currencies without currency conversion costs or exchange rate risks.

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    82 views8 pages

    Reasons For Growth of Eurocurrency Market

    Uploaded by

    Anushka Kharat
    The eurocurrency market grew for several reasons: 1. Regulations imposed by the U.S. Federal Reserve, such as limits on interest rates and reserve requirements, encouraged European banks to attract U.S. dollar deposits by offering higher rates. 2. Factors like the Interest Equalization Tax and restrictions on outbound investments from the U.S. pushed non-U.S. entities to borrow in the offshore eurocurrency market. 3. The eurocurrency market was more flexible and convenient for non-U.S. entities and multinational corporations to deposit and borrow foreign currencies without currency conversion costs or exchange rate risks.

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    REASONS FOR GROWTH

    OF EUROCURRENCY
    MARKET
    ■ Name : saleem r .mansoori
    ■ Class: tybcbi
    ■ Roll no : 20039
    Definition of Eurocurrency Market:
    The eurocurrency market is the money market for currency
    outside of the country where it is legal tender. The
    eurocurrency market is utilized by banks, multinational
    corporations, mutual funds, and hedge funds.
    Few Attributes of the eurocurrency markets are as follows:
    1. Free of domestic regulations
    Let’s take the example of the U.S. dollar. If one keeps U.S. dollar deposits in a
    foreign bank, say a bank in London, it is by default free of the regulations imposed
    by the U.S federal board.

    2. Unique operations
    Since each transaction occurs in a currency that is not of the originating
    country, the eurocurrency market’s dollar operations are unique in
    nature.

    3. An indispensable part of the monetary system


    Among its benefits is the fact that the eurodollar market features high
    interest rates and more flexibility on maturities. Furthermore, it is also the
    largest market for short-term funds.
    Factors contributing to the growth of eurocurrnecy :
    1. Regulation ‘Q’ of the Federal Reserve Act which imposed a ceiling on
    interest rates
    that could be given on deposits by banks in the US. This enabled European
    banks to
    attract US Dollar deposits by offering better interest rates.

    2. Regulation ‘M’ of the Federal Reserve Act which stipulated reserves to


    maintainted
    against deposits accepted by banks in the US. This increased the cost on deposits
    for banks in USA which widened the spread between deposit and lending rates.
    This
    feature was exploited by European banks, since they were not subject to reserve
    requirements on Euro-Dollar deposits.
    3. The mandatory requirement on all banks in the US to insure deposits accepted by
    them from the public. The Euro-Currency market is unregulated which means Eurobanks
    were under no obligation to insure Euro-Currency deposits. This reduced their
    cost on deposits .

    4. The Interest Equalization Tax introduced by the US monetary authority in 1963


    resulted in increasing the effective cost of borrowing in the United States for nonresident
    entities. They therefore approached the offshore market for their funding
    needs since Euro-banks wer not subject to the ‘Interest Equalisation Tax’.
    5. The Voluntary Restraint Program was introduced in the US in 1965 in terms of which,
    borrowing in the US for financing international projects was restricted. The US banks
    were discouraged from making loans to international borrowers. The guidelines were
    replaced by mandatory restrictions on outbound direct investments in 1968.
    Effectively, US Multinationals were also, now constrained to borrow in the offshore
    market for their international projects.

    6. Persons not resident in the US have unequal cash flows in USD. They acquire USD
    by exporting to the US and need the same to pay for imports from the US. At both
    times, conversion into/from domestic currency is involved. Such entities deposited
    their export proceeds with Euro-banks and withdrew them when needed to pay for
    imports. It became possible for such entities to maintain foreign currency resources,
    without incurring conversion cost, without exchange rate risk, earn the higher deposit
    rates available in the Euro-Currency market and have the convenience of dealing
    with local banks.
    Thank you

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