Chapter Four. EUROCURRENCY AND INTERNATIONAL FINANCIAL CENTERS.
Section 1. Introduction.
The external-eurocurrency market is integrated to the internal-domestic financial markets by the international transacting of global foreign exchange. The text has to this point developed a foundational understanding of the internal-domestic market of currencies and that they are subject to different regulation and requirements of the sovereign from which they are derived. The purpose of this segment is to expand upon the mechanism that functions to integrate the two currency markets in the international market place and explore the influences that are exerted from the internal-domestic markets to influence the Eurocurrencies in general.
Section 2. External Markets.
These are the markets that exist outside the internal-domestic financial markets. Often the term Euro market or eurocurrency markets is attributed to their designation; its inceptiion commencing in Europe.
To connect the relevance of external markets to internal-domestic financial markets, it is important to differentiate them from the internal-domestic markets. It requires exploring the mechanism by which internal-domestic markets and external-eurocurrency markets have by their very existence, inter-dependence. This inter-dependence facilitates a need to understand the effects of deregulation in the external market, the effects of internal-domestic monetary policy, internal-domestic public policy, and internal-domestic fiscal policy transmissions to the external-eurocurrency markets. The interaction that results between these two financial markets casts enormous influences on the international monetary system.
Transmission affects are generated by internal-domestic markets that affect internal-domestic markets and external-eurocurrency markets. This occurs as the result of monetary, fiscal, and public policy put in motion by a particular internal-domestic market. Those factors highlight the vulnerabilities of the internal monetary system. It necessitates the consideration of the tools of prevention afforded the lender of last resort in each internal-domestic market. (1) These considerations are utilized to avoid a liquidity crisis and maintain international monetary system stability. The inter-dependence of the internal-domestic markets and external-eurocurrency markets lend themselves to systemic risk.
Through out the 1980's globalization, financial market integration, and deregulation, the financial markets provided new efficiencies. The efficiencies have been dramatic and enabled cost reduction, increased the velocity of transactions, and provided a new liquidity element. But in process, it has added risks. The efficiency and speed has added volatility and volatility promotes increased risk. That results from increased volumes and capital flows.
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