We’ve explained that when US Dollar deposits are re-deposited outside America it is known as Euro-dollar. Same Euro-yen when it is re-deposited outside Japan. The bank balance in the UK of our familiar pound sterling would also take on the name of Euro-sterling when re-deposited outside Great Britain, Collectively; then, we can say that Eurocurrencies are deposits in currencies that are re-deposited outside the home countries of the currencies concerned. Although generally known as Euro-dollar, it is also know locally as, Asian dollar in Singapore। We also talk of petrodollar alluding to the huge amounts dollars accumulated by oil producing countries that keep on recycling in the
Eurocurrency market.
One may ask why the banks deposit or re-deposit US dollar outside USA. There are number of reasons. Perhaps the growth of Euro-dollar can be traced to an American law regulation Q, that laid down maximum retes which domestic banks could pay on time deposit. Sometime in 1950s, the European banks, especially the innovation loving bankers in London, staerted to lure holders of these dollar deposits by offering higher interest rates. Another regulation called interest equalization tax imposed by President Kennedy in 1963 discouraged foreigner’s use of domestic US bond market. This regulation drove the US Corporation outside the US to borrow Euro-dollar. Finally, since the euro market was exempt from Federal Reserve Bank’s reserve requirements, the American banks developed a practice of borrowing and lending outside the United States to avoid sterilizing part of their funds by way of statutory deposit with the central bank.
