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Concept
Eurocurrency
Summary
Eurocurrency is currency held on deposit outside its home market, i.e., held in banks located outside of the country which issues the currency. For example, a deposit of US dollars held in a bank in London, would be considered eurocurrency, as the US dollar is deposited outside of its home market.
The Euro- prefix does not refer exclusively to the "euro" currency or the "eurozone", as the term predates the creation of the euro. Instead, it can be applied to any combination of deposits in a foreign bank outside of its home market e.g. a deposit denominated in Japanese yen held in a Swiss bank is a Euroyen deposit.
Eurocurrency is used for short-to-medium term financing by banks, multinational corporations, mutual funds, and hedge funds. Eurocurrency is generally seen as an attractive source of global funding due to its ease of convertibility between currencies as well as typically lower regulatory measures compared to sources of funding in domestic markets. Eurocurrency and Eurobond markets avoid domestic interest rate regulations, reserve requirements and other barriers to the free flow of capital.
The relevance of eurocurrency deposits has been disputed ever since its inception in the 1950s by notable economists including Ronald McKinnon, yet it remains a prevalent aspect of the global financial system.
The emergence of Eurocurrency is closely tied to the origins of the Eurodollar as it was the first type of Eurocurrency. Eurodollars began from large quantities of US dollar-denominated deposits being held in European, namely London, banks during the 1950s. Over several decades, economists have produced several explanations of how eurocurrency came about, why it occurred in London, and how London managed to maintain a competitive advantage in the market as eurocurrency expanded globally. Environmental and political factors commonly underpin most theories, influencing the decisions of nations during this period known as the Bretton Woods Era.
Official source
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