Page 249 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes 3. Wholesale Market: The Eurodollar market is a wholesale market in the sense that the
Eurodollar is a currency dealt in only large units.
4. Highly Competitive and Sensible Market: Its efficiency and competitiveness are reflected
in its growth and expansion. The resiliency of the Eurodollar market is reflected in the
responsiveness of the supply of and demand for funds in the changes in the interest rates
vice versa.

factors that contributed to the Growth

The following are the important factors that have contributed to the growth of the Eurodollar
market at different stages and times.
1. Suez Crisis: The restrictions placed upon sterling credit facilities for financing trade which
did not touch the British shores during the Suez Crisis in 1957 provided a stimulus for the
growth of the Eurodollar market. The British Banks in search of an alternative way to meet
the demand for credit on the pat of the traders in this sphere, easily found a good substitute
in dollars. There was already available a pool of US dollars, held by residents outside the
US.
2. Relaxation of Exchange Controls and Resumption of Currency Convertibility: The general
relaxation of exchange control, the stability in the exchange market and the resumption
of currency convertibility in Western Europe in 1958 provided an added impetus to the
growth of the Eurodollar market. In a convertible currency system, some countries are as
a rule, in surplus and others in deficit. The money market in the surplus country being
liquid, short-term funds flow to the Euro market, attracted by the higher rate of interest.
On the other hand, credit flows from the euro market to the deficit countries where the
money market is tight.
3. Political Factor: The cold war between the US and the communist countries also contributed
to the growth of the Euro market. Due to fear of blocking or seizure of deposits by the US
in the event of hostilities, the Russian and East European banks sought to place their dollar
balances with European banks, especially British and French, rather than with banks in the
US.
4. Balance of Payments Deficit of the US: The large and persistent deficit in the balance of
payments in the US meant an increasing flow of the US dollar to those countries which had
surplus with the US.

5. Regulation Q: Some of the regulations of the Federal Reserve System especially the
Regulation ‘Q’ which fixed the maximum rate of interest payable by the banks in the US and
the prohibition of payment of interest on deposits for less than 30 days very significantly
contributed to the fast growth of the Euro market.
6. Innovative Banking: The advent of innovative banking, spearheaded by the American
banks in Europe and the willingness of the banks in the market to operate on a narrow
‘spread’ also encouraged the growth of the euro market.
7. Supply of Petrodollars: The flow of petrodollars, facilitated by the tremendous increase
in the OPEC’s oil revenue following the hike in the oil prices in the 19732, has been a
significant source of growth of the Eurodollar market.

Participants

Participants of the Eurocurrency business includes governments of all political categorizations,
international organizations, central banks, commercial banks, corporations, especially
multinational corporations, traders, individuals, etc.

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