Eurocurrency

What is 'Eurocurrency'

Eurocurrency is currency deposited by national governments or corporations, outside of its home market. For example, it can be currency held in banks located outside of te country which issues the currency. 

BREAKING DOWN 'Eurocurrency'

It is important to note that the term eurocurrency applies to any currency and to banks in any country. Having "euro" doesn't mean that the transaction has to involve European countries. For example, South Korean won deposited at a bank in South Africa, is considered eurocurrency. US dollars held in a UK bank, would also be considered eurocurrency. And Euros held in an Asian bank would be considered eurocurrency, too. However, in practice, European countries are often involved.

Eurocurrencies are traded in eurocurrency markets. Also known as "euromoney."

Eurocurrencies: A Brief History

In an essay on international finance for Princeton University Press, economist Ronald I McKinnon explained the rise of eurocurrency markets. In the late mid-70s, when he wrote the essay, it was largely not understood why eurocurrency markets came to be. He wrote, "the Eurocurrency market is unnecessary." This is because "to finance foreign trade for their customers, commercial banks could "easily obtain spot or forward foreign exchange in the interbank market that operates internationally, or draw on the balances of foreign currency held within correspondent banks."

This changed with the eurocurrency market. In the eurocurrency market, "banks resident in country A accept deposits and make loans in the currencies of countries B, C, D and so on, and depositors and borrowers are often non-residents."

This market arose due to the "peculiarly stringent and detailed official regulations governing residents operating with their own national currencies." According to McKinnon, "these regulations contrast sharply with the relative great freedom of nonresidents to make deposits or borrow foreign currencies from these same constrained national banking systems."

Essentially, the market eases local regulations and gives access to foreign currencies to offshore business. It has made doing business in one currency, in a market that does not issue that currency, much easier.