The word eurodollar applies to U.S. dollar-denominated securities at foreign banks or at across branches of American banks. Because they are taken outside the United States, eurodollars are not subjected to regulation by the Federal Reserve Board, including reserve conditions. The euro-dollar market is the production of international bankers. It is just a short-term money market helping banks’ borrowings and lendings of U.S. dollars. The Euro-dollar market is predominantly placed in Europe and primarily deals in U.S. dollars.
But, in a broader sense, the Euro-dollar market is limited to the external lending and financing of the world’s most prestigious convertible currencies like pound, dollar, Swiss franc, sterling, French franc, Deutsche Mark, and the Netherlands guilder. Euro-dollar processes are unparalleled in character since the transactions in each currency are performed outside the country where that currency introduces. The market draws funds by allowing high rates of interest, larger flexibility of maturities, and a broader range of investment qualities. Though the market is completely unofficial in character, it has converted into an indispensable component of the international monetary system. It is one of the most comprehensive markets for short-term funds.
Functions of Market
The market performs 3 important functions.
- International conduit for directing short and medium-term capital from surplus nations to deficit nations
- It enables cover operations in foreign exchange. Banks by trading with each other in the Euro-dollar market easily cover the forward foreign currency obligations that they have undertaken on behalf of their constituents and engage in covered interest arbitrage.
- The Euro-dollar market acts as a financial intermediary within the borders of a single country’s currency
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