Europeans wished to hold their assets outside their own country or in currencies which is not locally denominated. These investors were driven by the twin concerns of avoiding taxes in their own country and protecting themselves against falling values of domestic currency. Dollar denominated, Euro bonds were designed to address these issues.
These bonds were in bearer forms. Hence, there was no ownership and no tax withheld. The term Euro is used because the transactions originated in the Europe, mainly London. But later on expanded fast to the countries like Honk Kong and Singapore in the far East-at present more than half of the transactions in the Euro markets take place outside the Europe.
Thus, it is evident that the term ‗Eurodollar‘ is a misnomer. ‗Foreign Currency Market‘ would be the appropriate term to describe this expanding market. The term ‗Eurodollar‘ came to be used because the market had its origin and earlier developments with dollar transactions in the European money markets. Despite the emergence of other currencies and the expansion of the market to other areas, Europe and the dollar still hold the key to the market. Today, the term Eurocurrency market is in popular use.
Now, the ‗Eurodollar Market‘ consists of Asian dollar market, Rio dollar market, Euro- yen market, etc., as well as Euro-sterling, Euro-Swiss francs, Euro-French francs, Euro- Deutsche marks, and so on. In short, in these markets, the commercial banks accept interest bearing deposits denominated in a currency other than the currency of the country in which they operate and they re-lend these funds either in the same currency or in the currency of the country in which they operate or in the currency of a third country.
Its Annual Report in 1966, the Bank for International Settlements (BIS) described the Eurodollar phenomenon as ―The acquisition of dollars by banks located outside the United States, mostly through the taking of deposits, but also to some extent by swapping other currencies into dollars, and the re-lending of these dollars, often after re-depositing with other banks, to non-bank borrowers anywhere in the world.‖
Important Characteristics of the Eurocurrency Market are the following:
i) It is an International Market and it is under no National Control:
The Eurocurrency market has emerged as the most important channel for mobilizing and deploying funds on an international scale. By its very nature, the Eurodollar market is outside the direct control of any national monetary policy. ―It is aptly said that the dollar deposits in London are outside United States control because they are in London and outside British control because they are in dollars.‖ The growth of the market owes a great deal to the fact that it is outside the control of any national authority.
ii) It is a Short-Term Money Market:
The deposits in this market range in maturity from one day to several months and interest are paid on all of them. Although some Eurodollar deposits have a maturity of over one year, Eurodollar deposits are predominantly a short-term instrument. The Eurodollar market is viewed in most discussions more as a credit market- a market in dollar bank loans-and as an important accessory to the Eurobond market.
iii) The Eurodollar Loans are Generally for Short Periods:
Three months or less, Eurobonds being employed for longer-term loans. The Eurobonds developed out of the Eurodollar market to provide longer-term loans than was usual with Eurodollars. A consortium of banks and issuing houses usually issues these bonds.