What is a Eurocurrency Market?

Jason C. Chavis
Jason C. Chavis
Contrary to its name, the Eurocurrency market is primarily influenced by the US Dollar.
Contrary to its name, the Eurocurrency market is primarily influenced by the US Dollar.

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.

The eurocurrency market deals with the depositing of foreign currencies into domestic banks.
The eurocurrency market deals with the depositing of foreign currencies into domestic banks.

This market has its roots in the World War II era. While the war was going on, political challenges caused by the takeover of the continent by the Axis Powers meant that there was a limited marketplace for trading in foreign currency. With no friendly government operations within the European marketplace, the traditional economies of the nations were displaced, along with the currencies. To combat this, especially due to the fact that many American companies were tied to the well-being of business behind enemy lines, banks across the world began to deposit large sums of foreign currency, creating a new money market.

Several factors complicate the ability of the Federal Reserve to manipulate Eurocurrency markets.
Several factors complicate the ability of the Federal Reserve to manipulate Eurocurrency markets.

One of the factors that make the Eurocurrency market unique compared to many other money market accounts is the fact that it is largely unregulated by government entities. Since the banks deal with a variety of currencies issued by foreign entities, it is difficult for domestic governments to intervene, particularly in the United States. With the establishment of the flexible exchange rate system in 1973, however, the U.S. Federal Reserve System was given powers to stabilize lending currencies in the event of a crisis situation. One problem that arises is that these crises are not defined by the regulations, meaning that intervention must be established based on each case and the Federal Reserve must work directly with central banks around the world to resolve the matter. This adds to the volatility of the market.

A Eurocurrency market represents any deposit of foreign currencies into a domestic bank.
A Eurocurrency market represents any deposit of foreign currencies into a domestic bank.

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.

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Discussion Comments

anon74806

Due to the heavy fluctuation in currency rates and because of the diminishing strength of the US economy from the subprime crises, do you think the Euro will prove itself as the new world currency?

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    • Contrary to its name, the Eurocurrency market is primarily influenced by the US Dollar.
      Contrary to its name, the Eurocurrency market is primarily influenced by the US Dollar.
    • The eurocurrency market deals with the depositing of foreign currencies into domestic banks.
      The eurocurrency market deals with the depositing of foreign currencies into domestic banks.
    • Several factors complicate the ability of the Federal Reserve to manipulate Eurocurrency markets.
      Several factors complicate the ability of the Federal Reserve to manipulate Eurocurrency markets.
    • A Eurocurrency market represents any deposit of foreign currencies into a domestic bank.
      A Eurocurrency market represents any deposit of foreign currencies into a domestic bank.