Though the materialization of Euro-dollar in the international financial system is of modern origin, late in the sixties, it has caused a deep influence upon the money and capital market of the western world. Currently, however, the Euro dollar market has become an enduring integral part of the international monetary system.


                    Euro – dollar is inevitable to all US dollar deposits in banks outside the United States including the foreign branches of US banks. A Euro- dollar is, however, not an exceptional type of dollar. It bears the same exchange rate as an ordinary U.S dollar has in terms of other currencies.

                  Euro- dollar transactions are conducted by banks not resident in the U.S. For example, when an American citizen deposits /lends his funds with a U.S bank in London, which may again be used to make advances to business enterprises in the U.S. Then such dealings are referred to as Euro-dollar dealings. All Euro-dollar dealings are, however, unsecured credit.

                 Euro- dollar have come into existence on account of the Regulation issued by the Board of Governors of the U.S Federal Reserve System, which does not permit the bank to pay interest to the depositors above a certain limit. As such, bank outside the United States tend to swell their dollar business by offering higher deposits rates and charging lower lending rates, as compared to the bank inside the U.S increase or decrease in the forthcoming for Euro- dollar value. However, depends directly upon U.S deficits and Surplus respectively.


               Euro- dollar market is the design of the international bankers. It is basically a short-term money market facilitating banks borrowing and lending of U.S dollars. The Euro-dollar market is predominantly situated in Europe and mainly deals in U.S dollars. But in a wider sense, euro-dollar market is cramped to the external lending and borrowing of the world’s most imperative adaptable currencies like dollar, pound, sterling etc.


  1. It has emerged as a universal short term money market.
  2. It is unofficial but philosophical.
  3. It is free to use.
  4. It is aggressive and  competitive
  5. It is more flexible capital market.



  1. It has provided global short-term capital market, owing to a high degree of mobility of the Euro-dollars.
  2. Euro-dollars are useful for the financing of foreign trade.
  3. It has enabled the financial institutions to have greater elasticity in adjusting their cash and liquidity positions.
  4. It has enabled importers and exporters to scrounge dollars for financing trade. At cheaper charge than otherwise available.
  5. It has helped in plummeting the profit margins between deposit rates and lending rates.


    Following are some of the ways in which euro-dollar market has affected the     international financial system.

1. It has promoted international monetary co-operation.

2. Over the last decade the augmentation of euro-dollar has helped in slackening of the world liquidity problem.

3. The position of dollar has been strengthened momentarily, since their procedure of borrowing of dollars has become more profitable rather than its holdings.


1.It may lead banks and business firms to over-trade.

2.It mat weakens regulation within the banking communities.

3.It has rendered official monetary policies less valuable for the countries involved.

In fact the euro-dollar market has created two major problems for an individual country dealing in it.

a)      There is the hazard of over extension of the dollar credit by domestic banks of the country as a result; high demand pressure on the official foreign exchange may take place.

b)      The euro-dollar market appears as another channel for the short-term international capital movement for the country, so that the country’s volume of outflow or inflow capital may increase which may again imperil the foreign exchange reserves and the effectiveness of domestic economic policies. It has destabilization effect. It increases the pressure on exchange rate and official foreign exchange reserve. This may require additional liquidity. If such additional reserve are not provided it may endanger existence of the present gold exchange standard.

               Above all, the euro-dollar market has crashed the growth of semi-independent international interest rates, on which there can be no effective control by a single country.

Source by vinitha