Eurocurrency Market

Ray A. Gray II

FIN/366

March 28, 2016
Todd Kucker

Eurocurrency Market

A eurocurrency is any currency banked outside of its country of origin. The term eurocurrency is actually a misnomer because a eurocurrency can be created anywhere in the world; the persistent euro- prefix reflects the European origin of the market. Eurodollars, which account for about two-thirds of all eurocurrencies, are dollars banked outside of the United States. Other important eurocurrencies include the euro-yen, the euro-deutsche mark, the euro-franc, and the euro-pound (2016).

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 concept does not have anything to do with the European Union or the banks associated with the member countries, although the origins of the concept are heavily derived from the region. Instead, it represents any deposit of foreign currencies into a domestic bank. For example, if Japanese yen is deposited into a bank in the United States, it is considered to be operating under the auspices of the Eurocurrency market. Despite its name, the Eurocurrency market is primarily influenced by the value of the American dollar, since nearly two-thirds of all assets around the globe are represented by U.S. currency. The challenge with foreign banks revolves around the fact that regulations enforced by the Federal Reserve are really only enforceable within the U.S. The taxation level and exchange rate of the American dollar varies depending on the nation; for example, an American dollar in Vietnam is worth more than it is in Canada, further influencing the market (Wisegeek.org, 2016).

Until the late 1950s, US dollars deposited with banks outside the US were quickly repatriated because the banks