What Is Eurocurrency?
Let me explain eurocurrency directly: it's currency held on deposit by governments or corporations operating outside their home market. For instance, if you have a deposit of U.S. dollars (USD) in a British bank, that's eurocurrency, just like a deposit of British Pounds (GBP) in the United States would be.
Key Takeaways
- The term eurocurrency refers to currency deposits held at banks outside of their country of origin.
- The most famous example of eurocurrency is the eurodollar, which involves U.S. dollar (USD) deposits held outside the United States.
- Eurocurrency has become an extremely important facet of the global financial system, due to factors such as globalization and financial regulations.
Understanding Eurocurrency
You need to know that the term “eurocurrency” applies to any currency deposit held outside of the home market where that currency is issued. Importantly, despite the name, it doesn't have to involve European currencies at all. For example, South Korean won (KPW) deposited at a bank in South Africa counts as eurocurrency, even without any European element.
Eurocurrency plays a crucial role in the global financial system. As globalization has caused a sharp increase in cross-border transactions over recent decades, many banks now need access to deposits of local currency in various regions worldwide. This demand has created a large and active eurocurrency market, where international banks regularly exchange and lend foreign currencies from their eurocurrency deposits.
Beyond the growth in international transactions, regulation is another key reason for eurocurrency's widespread use. For many banks, borrowing from other banks via the eurocurrency market is a faster and more efficient way to secure short-term financing compared to options in their home market.
Real World Example of Eurocurrency
The most prominent example you'll encounter is the USD-denominated time deposits held at banks outside the United States. These are commonly called “eurodollars” and form an integral part of the global financial system, providing short-term USD funding for financial firms around the world.
Since the USD is the world’s reserve currency, almost all multinational corporations, banks, and governments need large amounts of USD for their routine obligations. These entities often turn to the eurodollar market for their short-term funding needs. While it's hard to get precise figures, recent estimates put the eurodollar market at nearly $14 trillion.
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