Explain how Eurocurrency is created.

Answer: The center of the international money market is the Eurocurrency market. A Eurocurrency is a time deposit of money in an international bank situated in a country dissimilar from the country that issues the currency. For instance, Eurodollars are deposits of U.S. dollars in banks situated outside of the United States. As an example, suppose a U.S. Importer purchases $100 of merchandise from a German Exporter and pays for the purchase by drawing a $100 test on his U.S. checking account (demand deposit).

If the funds are not required for the operation of the business, the German Exporter should be deposit the $100 in a time deposit in a bank outside the U.S. and get a greater rate of interest as compared to if the funds were put in a U.S. time deposit. Suppose the German Exporter deposits the funds in a London Eurobank. The London Eurobank credits the German Exporter along with a $100 time deposit and deposits the $100 into its correspondent bank account (demand deposit) along with the U.S. Bank (banking system) to hold as reserves. Two points are noteworthy. First, the whole $100 remains on deposit in the U.s. Bank. Second, the $100 time deposit of the German Exporter in the London Eurobank denotes the creation of Eurodollars. This deposit exists additionally to the dollars deposited in the U.S. therefore; no dollars have flowed out of the U.S. banking system in the creation of Eurodollars.