IMPORTANCE OF EURO DOLLARS IN WORLD TRADE AND FINANCE

INTRODUCTION Eurodollars are time deposits denominated in U.S.

dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S..

Gradually, after World War II, the quantity of U.S. dollars outside the United States increased enormously, as a result of both the Marshall Plan and imports into the U.S., which had become the largest consumer market after World War II.

Various history myths exist for the first Eurodollar creation, or booking, but most trace back to Communist governments keeping dollar deposits abroad.

INTRODUCTION In one version, the first booking traces back to Communist

China, which, in 1949, managed to move almost all of its U.S. dollars to the Soviet-owned BCEN- Euro bank in Paris before the United States froze the remaining assets during the Korean War.

In another version, the first booking traces back to the Soviet Union during the Cold War period, especially after the invasion of Hungary in 1956, as the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter.

On 28 February 1957, the sum of $800,000 was transferred, creating the first euro dollars. they eventually became known as "euro dollars"

“EURODOLLARS”U.S.-dollar denominated deposits at foreign banks or

foreign branches of American banks. By locating outside of the United States, eurodollars escape regulation by the federal reserve board.

Originally, dollar-denominated deposits not subject to U.S. banking regulations were held almost exclusively in Europe

These deposits are still mostly held in Europe

but they're also held in such countries as the Bahamas, Canada, the Cayman Islands, Hong Kong, Japan, the Netherlands Antilles, Panama and Singapore. Regardless of where they are held, such deposits are referred to as eurodollars.

Euro Vs DollarEURO area GDP: 15% Used as Reserve currency:

12.5% Economy: Much smaller World exports: 19.5% Economies as large as US

and net creditors to the world.

Euro will take time to reach similar status as dollar.

US area

GDP: 20.5%

Used as Reserve currency: 66%

Economy: much larger

World exports: 15%

Dollar will still prevail, especially in unstable economies, due to worldwide acceptance.

Factors for currency to be International currency Size of the economy – determines potential

share of currency in international trade Importance in international trade – size

linked to importance in international trade Size, depth, openness, liquidity of domestic

financial markets Convertibility of currency – important factor.

Restrictions limit use of currency Macroeconomic policies – affect country's

growth and openness of markets.

How the Eurodollar future contracts works?

The eurodollar futures contract was launched in 1981 by the Chicago Mercantile Exchange (CME), marking the first cash-settled futures contract.

The underlying instrument in eurodollar futures is a eurodollar time deposit, having a principal value of $1,000,000 with a three-month maturity.

The open outcry eurodollar contract symbol is ED and the electronic contract symbol is GE.

How the Eurodollar future contracts works?

A common use for Eurodollar futures contracts is for a company or a bank to secure the current interest rate on money it expects to borrow at a later time.

Eurodollars are low risk, but not risk free investments.

Eurodollar futures are a LIBOR based derivative, reflecting the London Interbank Offered Rate for a 3-month $1,000,000 offshore deposit.

Eurodollar Deposits

HistoryDefinition Interest RatesTotal Deposits in world

Particulars Eurodollar Deposits GDP Share 123.6

Trade With US 24.1Portfolio Investment 87.8FX Market Turnover 51.8

Constant 33.6

Euro Dollar Market

Euro-dollar market is the creation of the international bankers.

 The term Euro-dollar is used as a common term to include the external markets in all the major convertible currencies.

Euro-dollar operations are unique in character, since the transactions in each currency are made outside the country where that currency originates.

The Euro-dollar market attracts funds by offering high rates of interest, greater flexibility of maturities and a wider range of investment qualities.

Eurodollar benefits It has provided a truly international short-term capital market,

owing to a high degree of mobility of the Euro-dollars. Euro-dollars are useful for the financing of foreign trade. It has enabled the financial institutions to have greater

flexibility in adjusting their cash and liquidity positions. It has enabled importers and exporters to borrow dollars for

financing trade, at cheaper rates than otherwise obtainable. It has helped in reducing the profit margins between deposit

rates and lending rates. It has enhanced the quantum of funds available for arbitrage.

Effects of Euro Dollar Market on International Financial System:

The position of dollar has been strengthened temporarily, since its operations of borrowing of dollars have become more profitable rather than its holdings.

It facilitates the financing of balance of payments surpluses and deficits.

It has promoted international monetary co operation.

Over the last decade, the growth of Euro-dollar has helped in easing of the world liquidity problem.

COMPLICATIONS

Eurodollars are not spendable money

It reduces the value of domestic currency

It encourages people to spend money in different economy

A definite limit of amount can be created as Eurodollar

EURODOLLAR POLICIES Special charges and taxes

Reserve requirements on deposits

Interest rate ceilings

Labor must be mobile. People should be able to move from an area suffering from recession to one that is enjoying an economic boom. 

 Eurodollar needs that wages and prices must be flexible. 

There must be some way of transferring resources to the country or region which is in dire economic straits in order to help it recover from its recession. 

 Countries must be politically willing to adopt the Eurodollar common currency.

Requirements of Eurodollar

Why To adopt Euro-Dollar? Eurodollar, a single currency increases the

transparency of prices.

 Having a single currency, using the Eurodollar, makes economic transactions easier than having different currencies for the union.

  Eurodollar reduces the transaction costs of buying and selling goods because people do not have to convert money from one currency to another.

   Eurodollar would eliminate exchange rate risk among

the countries that shared the Eurodollar currency.  

Why To adopt Euro-Dollar?Using Eurodollar, USA and Europe could no

longer use devaluations as part of their economic policy to gain an advantage one over the other. 

 Because the Central Bank which would oversee the Eurodollar union would not be controlled by a single government, it would be easier for the Central Bank to focus on its primary objective-to control prices and fight inflation.

 Eurodollar would encourage international trade and reduce the disruptions that result from currency fluctuations.