CHAPTER 1

INTRODUCTION

It is a market for Borrowing and Lending of currency at the center outside the country in

which the currency is issued. It is different than the Foreign Exchange Market, wherein the

currency is bought and sold. Euro (€) is a single currency which was launched on 1st

Jan’1999. (With 11 of 15 member countries of the European Union participating in the

experiment) .Now Euro (€) is the official currency of 16 of the 27 member states of the

European Union (EU). These 16 states include some of the most technologically advanced

countries of the European continent and are collectively known as the Euro zone. The Euro is

an important international reserve currency. Euros have surpassed the US dollar with the

highest combined value of cash in circulation in the world. The name euro was officially

adopted on 16 December 1995. The euro was introduced to world financial markets as an

accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU)

at a ratio of 1:1.

The currency was introduced initially in non-physical forms, such as travellers’

checks and electronic bank in Euro coins and banknotes entered circulation on 1 January

2002.The Euro is administered by the European Central Bank (ECB) based in Frankfurt, and

the Euro system, comprising of the various central banks of the Euro zone nations.

The states, known collectively as the Eurozone:

are Austria, Belgium, Cyprus, Finland,France, Germany, Greece, Ireland, Italy, Luxembour

g,Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The currency is also used

in a further five European countries, with and without formal agreements. and is

consequently used daily by some 327 million Europeans. Over 175 million people worldwide

use currencies which are pegged to the euro, including more than 150 million people in

Africa.

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1.1 HISTORY

After World War II, the amount of US Dollars outside the United States increased

enormously, both as a result of the Marshall Plan and as a result of imports into the USA. As

a result, large sums of US Dollars were in custody of foreign banks outside the United States.

Many foreign countries, including the Soviet Union, had deposits in US dollars in USA

banks.

After the invasion of Hungary in 1956, the Soviet Union

feared that its deposits in American banks could be frozen

as retaliation. A British bank offered the Soviets the

possibility of receiving its US Dollar reserves as deposits,

outside the USA. This operation was considered the first to

create so-called Eurodollars.

Gradually, as a result of the successive commercial deficits of the United States, the Eurodollar

market expanded until today where it is available in virtually every country. Today, Eurocurrency

refers to deposits in any currency residing in banks that are located outside the borders of the

currency’s country. For example a deposit denominated in Yen residing in an Australian bank is a

Eurocurrency deposit, or more specifically a EuroYen deposit. Similar external deposits apply to

EuroSterling, EuroEuro, EuroSwissFranc, etc.

While opening up of the domestic markets began only around the end of seventies, a truly

international financial market had already been born in the mid-fifties and gradually grown in

size and scope during sixties and seventies.

This refers to the well-known ‘Eurocurrencies Market’. It is the largest offshore market.

Prior to 1980, Eurocurrencies market was the only truly international financial market of any

significance. It is mainly an inter-bank market trading in time deposits and various debt

instruments. What matters is the location of the bank neither the ownership of the bank nor

ownership of the deposit.

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The prefix "Euro" is now outdated since such deposits and loans are regularly traded outside

Europe.

Over the years, these markets have evolved a variety of instruments other than time deposits

and short-term loans, e.g. certificates of deposit (CDs), euro commercial paper (ECP),

medium- to long- term floating rate loans, eurobonds, floating rate notes and euro medium-

term notes (EMTNs).The difference between Euro markets and their domestic counterparts is

one of regulation.

Eurobonds are free from rating and a disclosure requirement applicable to many domestic

issues as well as registration with securities exchange authorities.

Emergence of Euro markets:

1. During the 1950s, the erstwhile USSR was earning dollars from the sale of gold and other

commodities and wanted to use them to buy grain and other products from the West, mainly

from the US. However, they did not want to keep these dollars on deposit with banks in New

York, as they were apprehensive that the US government might freeze the deposits if the cold

war intensified.

They approached banks in Britain and France who accepted these dollar deposits and

invested them partly in US.

2. Domestic banks in US (as in many other countries) were subjected to reserve requirements,

which meant that a part of their deposits were locked up in relatively low yielding assets.

3. The importance of the dollar as a vehicle currency in international trade and finance

increased, so many European corporations had cash flows in dollars and hence temporary

dollar surpluses. Due to distance and time zone problems as well as their greater familiarity

with European banks, these companies preferred to keep their surplus dollars in European

banks, a choice made more attractive by the higher rates offered by Euro banks.

The main factors behind the emergence and strong growth of the Eurodollar markets were the

regulations on borrowers and lenders imposed by the US authorities who motivated both

banks and borrowers to evolve Eurodollar deposits and loans.

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Added to this are the considerations mentioned above, viz. the ability of Euro banks to offer

better rates both to the depositors and the borrowers and convenience of dealing with a bank

that is closer to home, which is familiar with business culture and practices in Europe.

The origin of the Eurocurrency market is that the market in currency trading outside their

respective domestic economy. Several factors were behind their birth:

(1). The centrally planned economies were reluctant to hold bank deposits in the United

States, so they put their dollar earnings on deposit in London. Gradually other European

dollar holders did the same, a tendency that was particularly marked when the United States

ran large balance of payments deficits.

(2). Balance of payments pressures made the United Kingdom government limit British

banks’ external use of sterling, so they had a strong incentive to develop business in foreign

currencies.

(3). By the end of 1958 the main industrial countries had restored full convertibility of their

currencies. The new freedom produced a surge of international banking business.

The growth of the Eurocurrency market was also stimulated by certain monetary regulations

in the United States. For instance, Regulation Q put a ceiling on the interest rates that banks

operating in the United States could offer to domestic depositors were naturally attracted to

Eurobanks that were not bound by Regulation Q. In addition, banks in the United States were

required to hold non-interest-bearing reserves. By diverting dollar deposits to their offshore

branches or subsidiaries, U.S. banks were able to avoid tying up so much of their funds in

reserve requirements at a zero rate.

General controls on the movement of capital also helped to boost the Eurocurrency markets.

One example was the introduction, in 1965, of the Voluntary Foreign Credit Restraint

Program (VFCR) in the United States. The specific goal of the VFCR was to limit the growth

of foreign lending by U.S. banks. Instead, their foreign branches-which were not subject to

the VFCR- took deposits and onlent them outside the ceiling. Between 1964 and 1973 the

number of U.S. banks with overseas branches increased from 11 to 125. The number of

branches increased from 181 to 699 over the same period.

At the end of the 1960s and during the early 1970s the Eurocurrency markets, which had

been located in Western Europe (and centered in London), expanded to a number of other

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“offshore” banking centers. These were typically small territories that had tax, exchange

control, and banking laws favorable to international banks. The business was entrepot in

nature, with foreign currency funds deposited by one foreign source and then onlent to

another. Offshore centers have been set up in the Caribbean area, Latin America, the Middle

East, and establishment of international banking facilities (IBFs) in the United States

designed to bring the locus of American banking business back “onshore”.

With the recent strong growth of domestic currency lending abroad, total international

lending is now the most meaningful lending aggregate, and it encompasses Eurocurrency

market activity.

There has been a lot of interest lately in the Foreign Exchange Markets or Forex. Now for

those that are interested in discovering how this market can build wealth you should probably

understand some of the basics and a little of the history about international currency trading.

So first things first. The Forex market is big. In fact over 3 Trillion dollars are exchanged on

a daily basis. This is great news for those that decide to trade with Forex because you have

such a large amount of people trading on the exchange that you never have to worry about

whether or not you’re going to be able to dump a currency if it’s not heading in the direction

that you want it to go in because you will always have somebody who is willing to buy it

(meaning this is a liquid market). And there’s even trading software out now that if the

currency reaches a certain level your broker will automatically sell your shares so that you

will not even lose a single cent from your initial investment.

It’s not going away. The exchange was formed back in 1971 when the gold standard was

removed and countries started using free floating currencies. At first only banks and large

investment actually traded on this exchange and the managers that did it correctly ended up

making millions and even billions of dollars from it. Unfortunately the little guy couldn’t

really play without an entrance into the market from somebody higher up. That was until the

internet came along and made it so that anybody with a little bit of cash can start doing online

foreign currency trading and make really good money.

The laws of supply and demand are always at work. One thing that has been playing on the

news is the situation that Greece is finding itself in where they are basically having the same

problems that our system was having and banks from all over the EU are trying to keep their

economy afloat. This has caused the weakening of the Euro (currency used in many European

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countries) while having a strengthening effect on the dollar because people were afraid of

losing money in the Euro. This is just an example that could go any which way. Some days

the dollar will weaken so you know to bet on the Euro, etc.

This intro is just the tip of the iceberg when it comes to international currency trading and all

that can be accomplished in it. Just remember do your homework, run your simulations so

that you’ll know you can be a success at it and then after that stick to what works.

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1.2 FEATURES OF EURO CURRENCY MARKET

1. Types of transactions

2. Control of the country of issue of the currency

3. Huge amounts of transactions

4. Highly competitive Market

5. Floating rates of interest based on LIBOR

6. Dominance of Dollar denominated transactions

7. Four different segments

Types of transactions :

Japanese Exporter, earning USD, keeps these USD in London Bank (say AMEX)as

Deposit. AMEX bank may use such deposits for lending to a French Importer. Indian

exporter, earning Japanese Yen, keeps these Yen in Korea as Deposit .Nigerian Importer

avails loan in INR from Russia to import machinery from India.

Huge amounts of transactions:

Generally they are in only millions of USD.This has lead to Syndication of loans,

where large numbers of banks participate in the lending operations.It also consists of pool of

large number of short term deposits, which provides the biggest single source of funds for

commercial banks .

Highly competitive Market:

There are no entry barriers. There is free access to the new institutions in the market.

The lending rates are low and deposit rate are high, thus allowing a wafer thin margin for

operations. Consumers, i.e. investors and borrowers derive advantage out of this situation.

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Floating rates of interest based on LIBOR :

The rate of interest in the market is linked to the Base Rate usually LIBOR, i.e.

London Inter-Bank Offered Rate .The rate of interest on advances and deposits is reviewed

periodically and amended according to changed circumstances, if any in LIBOR.

Dominance of Dollar denominated transactions:

Dollar is a leading currency traded in the market (about 90% to 95% market

share).However other currencies are now emerging thus reducing the role of dollar somewhat

(about 80% market share)

Euro

Japanese Yen

Pound Sterling

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1.3 Eurocurrency Market Characteristics

The Eurocurrency market has several interesting characteristics:

1. It is a wholesale rather than retail market, which means that transactions tend to be very

large. Public borrowers such as governments, central banks, and public-sector corporations

tend to borrow most of the funds. Also, nearly four fifths of the Eurodollar market is

interbank, which means that the transactions take place between banks.

2. The market is essentially unregulated.

3. Deposits are primarily short term. Most of the deposits are interbank, and they tend to be

very short term. This leads to concern about risk, since most Eurocurrency loans are for

longer periods of time.

4. The Eurocurrency market exists for savings and time deposits rather than demand deposits.

That is, institutions that create Eurodollar deposits do not draw down those deposits into a

particular national currency in order to buy goods and services.

5. The Eurocurrency market is primarily a Eurodollar market. In addition to ordinary deposits

in the Eurocurrency market, there are also certificates of deposit (CDs) available in dollars,

sterling, and yen. Although most are traded in multiples of $1 million or more, The CDs are

usually quoted at a discount at a fixed interest rate, but they can also be quoted at floating

interest rates. The Eurocurrency market has short- and medium-term characteristics. Short-

term Eurocurrency borrowing has a maturity of less than one year. However, it is also

possible to borrow at maturities exceeding one year. Anything over one year is considered a

Eurocredit. These Eurocredits may be loans, lines of credit, or other forms of medium- and

long-term credits, including syndication, in which several banks pool resources to extend

credit to a borrower. A major attraction of the Eurocurrency market is the difference in

interest rates as compared with domestic markets. Because of the large transactions and the

lack of controls and their attendant costs, Eurocurrency deposits tend to yield more than

domestic deposits, and loans tend to be relatively cheaper than in domestic markets. Figure

9.3 illustrates these differences in interest rates. Traditionally, loans are made at a certain

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percentage above the London Inter-Bank Offered Rate (LIBOR), which is the interest rate

banks charge one another on loans of Eurocurrencies. The interest rate above LIBOR, which

is characterized in Fig. 9.3 as the Eurocurrency borrowing rate, depends on the credit-

worthiness of the customer and must be large enough to cover expenses and build reserves

against possible losses. The unique characteristics of the Eurocurrency market allow the

borrowing rate usually to be less than it would be in the domestic market. Most loans are

made on variable-rate terms, and the rate-fixing period is generally six months, although it

could also be one or three months. Because of the variable nature of the interest rates, the

maturities can extend into the future.

The LIBID is the bid rate that corresponds to the LIBOR, and the difference between the

LIBOR and the LIBID is usually about one eighth of a percentage point. The rate one earns

on deposits in the Eurocurrency is usually less than the LIBID, but it is often more than can

be earned in the domestic market.

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CHAPTER 2

COUNTRIES RESPONSIBLE FOR THE GROWTH OF THE EURO-

CURRENCY MARKET

China (fear that its Fx in USD would be blocked), USA (indeed blocked identifiable

Fx in USD in1950, federal Reserve Act, regulation ‘Q’ and ‘M’; control and restrictions on

borrowing funds in US in 1965, and introduction of interest equalization tax in 1963), Korea

(War broke out in 1950), Russia (erstwhile USSR) {because of their banking presence in

Paris and London}, and UK (policy of not granting sterling loan outside sterling area in

1957).

2.1 Segment 1: Euro-Credit Markets

Tenure: Medium and Long Term Loans [up to 10--15 years 10% of loans, 5—8 years 85% of

loans, 1– 5 years 5% of loans] provided by group of banks.

1. Amount: It is a wholesale sector of the international capital market.

2. Security: Loans are provided without any primary or collateral security. Credit rating

is the essence of lending

3. Type of loan:

A) Revolving [like cash credit]

B) Term Credit

4. Interest Rate: Generally 1% above the reference rate, rolled over every six moths

5. Currency: Generally USD, but can be any other currency, as required by the

borrower and ability of the lender.

Syndication of Loan:

– Managing banks, as desired by the borrower

– Lead bank, generally who takes the largest share of lending

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– Agent bank, as required to take interest of the banks in syndication and

comply with the procedure

– Common assessment of the borrower and his country

– Common documentation

– In very few cases co-financing with IMF or IBRD is possible

2.2 Segment 2: Euro-Bonds

• Euro-Bonds are unsecured securities

• They are therefore issued by borrowers of high financial standing

• When they are issued by government corporation or local bodies, they are guaranteed

by the government of the country concerned

• Euro-Bond is outside the regulation of a single country. The investors are spread

worldwide

• However foreign bonds are issued in only one country and are subject to the

regulation of the country of issue.

• Selling of EB is through syndicates of the banks

• Lead manager advises about size, terms and timing of the issue

• Entire issue is underwritten

• Lead manager’s fees, underwriting commission and selling commission is somewhere

between 2% and 2.5% of the value of the issue

• Lead manager allocates the bonds to all members of the selling group at face value

less their commission

• Thereafter every member is on his own

• They can sell to investors at whatever price they can obtain

• Thus no two investors in the Euro-Bond market need pay the same price for the newly

issued bonds

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Features of Euro-Bonds:

• Most Euro-Bonds are bearer securities

• Most bonds are denominated in USD 10,000

• Average maturity of the Euro-Bond is 5 to 6 years

• In some cases maturity extends to 15 years

Types of Euro-Bonds:

• Straight or Fixed Rate Bonds

• Convertible Bonds

• Currency Option Bonds

• Floating Rate Notes

Straight or Fixed Rate Bonds

1. These are fixed interest bearing securities

2. Interest is normally payable yearly

3. Year is considered of 360 days

4. Maturities range from 3 years to 25 years

5. Right of redemption before maturity may be there or may not be there

6. If the right of redemption is there then redemption is done by offering an

agio(premium)

Convertible Bonds

1. These are fixed interest bearing securities

2. Investor has an option to convert bonds into equity shares of the borrowing company

3. The conversion is done at the stipulated price and during the stipulated period

4. Conversion price is normally kept higher than the market price

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5. The rate of interest is lower than the rate of interest on comparable straight bond.

6. Sometimes the bonds are issued in a currency other than the currency of the share.

This provides an opportunity to diversify the currency risk as these bonds are issued

with fixed exchange rate of conversion

7. Bonds with warrants: warrant is part of the bond but is detachable and traded

separately, when the conversion takes place. The investor can keep the bond and trade

the warrant for shares.

Currency Option Bonds

• They are similar to straight bonds

• Generally issued in one currency and option to take interest and principal in another

currency.

• Exchange Rate is either fixed (generally not) or is spot rate prevailing in the market

three business days before the due date of payment of interest and principal

Floating Rate Notes

• FRN is similar to straight bonds with respect to maturity and denomination

• Rate of interest however varies and is based on LIBOR + 1/8%, ¼%,1.5%........

• Rate of interest is adjusted every six months

• Minimum interest rate clause may be included

• ‘Drop lock’ clause may also be included, which means if minimum interest rate

happens to be paid then it is locked for the remaining period of the bond.

• Generally it is found that banks issue and invest in FRNs

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2.3 Segment 3: Euro-Currency Deposits

1. Euro-bonds represent the funds amassed by the bank on behalf of international

borrower; Euro-currency deposits represent the funds accepted by the bank

themselves.

2. The Euro-currency market consists of all deposits of currencies placed with the banks

outside their home currency.

3. The deposits are accepted in Euro-currencies, as well as currency cocktails (SDR,

ECU etc.)

4. The deposits are placed at call (overnight, two days or seven days notice) for USD,

Sterling pounds, Canadian dollars and Japanese Yen; and of two days in any other

currencies

5. Time deposits are accepted for periods of 1,3,6 and 12 months for all currencies

6. USD and Sterling pound can be placed for a period of five years

7. Minimum size of deposit is USD50,000 or its equivalent

Euro-Currency Deposits Certificate of Deposit

1. It is negotiable instrument

2. They are bearer instrument and can be traded in the secondary market

3. Period: 1 year (1 month through 12 months)

4. Minimum amount: USD50,000

5. Currencies: USD, Sterling Pound, Yen

6. Interest Rate: 1/8 % below LIBOR

7. Tranche CD: carries different rates of interest for each tranche

8. Discount CD: they are issued at discount

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2.4 Segment 4: Euro-Notes Market

1. This market constitutes the instruments of borrowing issued by the corporates in the

Euro-currency market

2. The instruments issue may be underwritten or may not be underwritten

3. The borrowers directly approach the lenders without the intermediation of the banks

or financial institution.

4. Instruments are of the following categories:

1. Commercial Paper

2. Note issuance Facilities

3. Medium Term Notes

Commercial Paper

1. It is a promissory note with maturity less than a year, generally the period varies

between 90 days to 180 days

2. Generally issue is not underwritten

3. Amount: USD 100,000 or equivalent

4. Issued on ‘Discount to Yield ‘ basis, but interest rate works out lesser than that is paid

on bank borrowing and higher than that is paid by the bank on deposits

5. They are unsecured instrument

Note Issuance Facilities (NIF)

1. Borrowers place short term notes of 3 months to 6 months maturity directly with the

investors and the notes are rolled over on maturity

2. The banks underwrite at the time of issue as well as when the notes are rolled over

3. With slight variation they are also known as:

1. Revolving underwriting facility (RUF)

2. Standby Note Issuance Facility (SNIF)

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3. Note Purchase Facility (NPF)

Medium Term Notes

1. MTN represents Long Term, Non Underwritten and fixed interest rate source of

raising finance.

2. It can be comparable with Euro-bonds with a difference that Eurobonds issue is

underwritten, where as MYN issue is not underwritten.

3. Their maturity is somewhere between short term CPs(less than one year) and long

term Euro bonds(more than five years)

4. They are privately placed and have great flexibility

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CHAPTER 3

3.1 COUNTRIES USING EURO CURRENCY

On January 1, 1999 one of the largest steps toward European unification took place with the

introduction of the euro as the official currency in eleven countries (Austria, Belgium,

Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain).

However, residents of the first European Union countries that adopted the euro didn't begin

using euro banknotes and coins until January 1, 2002.

A one-euro coin is shown. The euro is used throughout Europe as an international

currency. The symbol of the euro is €, the letter "E" with one or two cross lines.

Euro Countries

Today, the euro is one of the world's most powerful currencies, used by more than 320

million Europeans in twenty-two countries. The countries currently using the euro are:

1) Andorra

2) Austria

3) Belgium

4) Cyprus

5) Estonia

6) Finland

7) France

8) Germany

9) Greece

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10) Ireland

11) Italy

12) Kosovo

13) Luxembourg

14) Malta

15) Monaco

16) Montenegro

17) Netherlands

18) Portugal

19) San Marino

20) Slovakia

21) Slovenia

22) Spain

23) Vatican City

On January 1, 2009, Slovakia started using the euro. Estonia began using the euro on January

1, 2011. Lithuania and Latvia are expected to join the Eurozone in the next few years and

thus become countries using the euro.

Only 17 of the 27 members of the European Union (EU) are part of the Eurozone, the name

for the collection of EU countries that utilize the euro. Notably, the United Kingdom,

Denmark, and Sweden have thus far decided not to convert to the euro. Other new EU

member countries are working toward becoming part of the Eurozone.

On the other hand, Andorra, Kosovo, Montenegro, Monaco, San Marino, and the Vatican

City are not EU members but do officially use the euro as their currencies.

The Euro - €

The symbol for the euro is a rounded "E" with one or two cross lines - €. Euros are divided

into eurocents, each eurocent being one one-hundredth of a euro.

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3.2 EURO (EUR) CURRENCY TRAITS

The Euro enjoys high liquidity. Additionally, all of the Euro crosses are characterized by

great liquidity. The EUR/USD currency pair is the most liquid one among all others.

In January 1, 1999 the introduction of the Euro as an electronic currency was made. This is

the time when the pre-EMU currencies were replaced by the Euro. Only the Greece currency

was not converted at this time, but instead in January 2001.

The relatively new nature of the Euro has attached to it some risks that cannot be found in

other currencies. One of them stems from the ECB, which is viewed as an untested financial

institution. The risks come from the fact that the ECB has a short history and has not yet

proven its efficacy and efficiency. Since the bank has no long history, market participants

don't have background information regarding the way it will act under different market

conditions. 

Another risk associated with the Euro concerns its susceptibility to political and economic

uncertainties. This risk stems from the fact that the Euro is the official currency of 12

member states and a change in any one country is reflected in its value.

The Euro sentiment is indicated by the spread between US Treasuries and Bunds. In order to

gauge any potential euro exchange rate changes, the ten-year government bonds should be

referred to. Euro movements can be indicated by the differential between the 10-year US

government bond and the 10-year German Bund. The Euro value is said to be increasing if

the Bund rates are greater than the treasury rates and an increase in the differential is

observed. Additionally, if the spread widens it may indicate the increase in the value of the

EUR. Alternatively, the value of the EUR is decreasing if the differential falls or a tightening

of the spread is observed.

The Euribor Rate

The Euribor rate (also known as the Euro interbank offer rate or the 3-Month Interest Rate)

represents the interest rate at which large banks offer to one another interbank term deposits.

The Eurodollar futures rate and the Euribor futures rate tend to be compared by forex market

participants. Eurodollars represent deposits that are placed outside the US and are held in US

dollars.

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When the spread between the Euribors and the Eurodollar future increase, investors tend to

direct their assets to European fixed income assets. This is generally so, because investors are

attracted by the high yields of assets. On the other hand, if this spread decreases, investors

divert their attention from the European assets. This will eventually result in a decrease in the

money flows into the EUR.

The movements in the EUR/USD are also influenced by the made Mergers and Acquisitions

(M&A). The M&A activity has significantly increased among the EU and the US, which has

led to an impact on the value of the EUR on short term basis.

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3.3 THE MOST IMPORTANT IMPLICATIONS OF HAVING A

COMMON CURRENCY, THE EURO, ARE:

Exchange rate certainty while travelling across Europe

No exchange risk and, therefore, no cost of hedging against it

No transaction costs

Increased transparency and fewer transactions for importers and exporters

Increased liquidity in the ‘United Euro’ financial market

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CHAPTER 4

SOME RECENT NEWS

4.1 THE EURO AND POUND WEAKEN TOWARDS THE END OF THE YEAR

The Euro and Pound Weaken towards the End of the Year: A quiet week spent in the

financial markets where the year-end recess is felt in the lack of volume. Current week last

year, could be more resentful and although brief, started on Saturday with the announcement

of interest rate hikes in China (surprise when, not up).

Oil and several bags of the world marked highs not seen since before the fall of Lehman

Brothers, supported by encouraging economic data from several countries. In the last round

of publications, the United States surprised optimistic data that suggest that the activity is

picking up, although not at a great pace, but continues to rise, which is an encouraging detail.

The euro and the pound, the decline of both currencies was relatively moderate, but served to

highlight that are weakened as the decline occurred in the context of a rise in the markets and

a strong appetite for risk.

The European central bank lowered the rate of days back purchases of securities which can

be taken as a drop in the stress level in the European debt markets. Since the program began

in May, the ECB has already bought more than € 70,000 million.

The rating agencies are lowering and placing notes for potential losses on the PIGS and local

banks, but as the news is not surprising that its effects on the market are limited. At PIGS

joined Belgium, whose shares fell sharply, the difference is that for the moment the main

problem is political and not economic. Just a rebate or a strong warning to countries like

France or the UK could generate too much noise in the market.

Spain had to pay back more debt in the market place, but on the positive side, the funds

offered far exceeded the previous bid.

China offered its support to Europe and was ready to act. While this initially helped the euro,

at the moment are only these. Concrete action if he could play in favor of European currency.

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In Britain the growth prospects are not good and there is little optimism about 2011.

Although there is no pessimism, there are still analysts who claim that the Bank of England

would be forced to follow the Federal Reserve and increase their purchases of securities

program. Inflation is generating a little headache, as it remains above the key and start of the

new year may not help as it starts with a tax increase could put further pressure prices

upward.

Last week came a sharp increase in public debt of the United Kingdom in November, along

with a slight downward revision of GDP. Data that was not positive for the pound. It was also

discovered that the mortgage loans are in freefall. On the other hand, the minutes of the Bank

of England did not produce surprises.

Dollar Reaches, The greenback closed at a loss on almost all fronts and got up slightly

against the pound and the euro, weakened by the appetite for risk. The U.S. Economic

Indicators continued to show positive signs. While not exceeded market expectations, did not

show any negative surprises.

Regarding the foreign exchange market against the euro (EURUSD), the dollar maintained its

upward bias in the short term (bassist in graphics) as the pair continue trading at levels below

1.33. It is likely that a drop below 1.2970 allow larger decline, although this scenario may be

unlikely for this week.

Crossing against the pound (GBPUSD) reached minimum of three months, confirming the

break of a major uptrend line. Just a return of about 1.58 would break the current downtrend.

The Bull, the pair has also considerable resistance in the 1.5650 area, while the low of 1.53

we find a carrier to be broken, would enable greater casualties.

Against the yen (USDJPY) the dollar weakened after breaking a major uptrend line that had

been guiding the movement from historical lows. This event weakened and caused a drop in

the pair, so far it seems limited product of the rise in government bond yields and a greater

appetite for risk. However, removing the root causes, technically the pair has lost strength.

The Bull, a break above 84.50 would strengthen, pushing it to 85.00 initially.

The yen and the aussie, the best

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The Japanese currency also assessed against the dollar, so did several of their foreheads, with

moderate rates. However, the best performance was the Australian dollar against the dollar

managed to return to the level of parity, which will be put under test in the last week of the

year following the rate hike in China.

The New Zealand dollar (NZD) surprised by their strength and they met very negative data

for the economy of that country. While initially fell, then drove along the market making us

forget that publication.

The rise in commodity prices and the weakness of the dollar helped propel these currencies

shyly. The outlook for the medium and long term from a fundamental standpoint the remains

encouraging, although the short term, it is not clear and the time of the month and year, not

only increases the uncertainty.

The rate hike in China may have limited effects on this group of coins, as though surprised at

the time, was an expected event and was only 25 basis points. Inflation in the Asian giant

grew by more than expected and while it was at these levels, it is expected that the rate

continues to rise.

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4.2 ASIAN MARKETS SLIP AS EUROZONE FEARS OUTWEIGH US DATA

Asian Markets Slip As Eurozone Fears Outweigh US Data: Asian shares fell in thin pre-

Christmas trade on Friday as Eurozone fears returned after Portugal’s debt rating was cut due

to concerns it could slip into recession.On a shortened trading day for some markets, the

news from Europe led investors to ignore a batch of upbeat data supporting hopes for a strong

recovery in the United States.

Tokyo fell 0.65 percent, or 67.29 points, to 10,279.19 as exporters were hit by the euro’s

weakness against the yen.

Dealers sold off the single currency after ratings agency Fitch cut its rating on Portuguese

debt a notch, citing a “deteriorating near-term economic outlook”.

The agency pointed out that it was increasingly difficult for Lisbon to find financing since its

last assessment in March and predicted it was likely to fall into recession in 2011.

The euro stood at 108.99 yen in early Tokyo trade Friday, slightly up from

108.83 in New York late Thursday but down from 110 levels before Portugal’s downgrade.

The single currency was also at 1.3127 dollars, slightly up from 1.3118 in New York. The

dollar stood at 83.01 yen, up slightly from 82.91.

“It’s starting to appear that the weak euro is going to plague the market next year as well,”

Yutaka Yoshii, general manager at Mito Securities, told Dow Jones Newswires.

Hong Kong, which was on a half-day, ended 0.30 percent, or 69.17 points, lower at 22,833.80

while Sydney fell 0.45 percent, or 21.7 points, to 4,777.3.

Shanghai was 0.55 percent off in the afternoon due to lingering concerns over possible

monetary tightening measures from China as the government tries to rein in inflation.

Despite the losses, Asian markets were given a good lead from the United States, where

jobless claims fell, consumer confidence rose and the housing market, which was at the heart

of the financial crisis, seems to picking up.

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At the same time consumers earned and spent more in November, boosting expectations for a

strong holiday shopping season.

New jobless claims sat around their lowest levels of the year last week at 420,000, according

to the Labor Department.

And sales of new homes in the United States in November rose 5.5 percent month on month

to 290,000, reaffirming that the struggling housing market was slowly recovering.

The US data kept oil hovering around two-year highs. New York’s main contract, light sweet

crude for delivery in February, shed 13 cents to 91.38 and Brent North Sea crude for

February advanced 18 cents to 94.43 dollars.

Gold opened at 1,380.00-1,381.00 US dollars an ounce in Hong Kong, down from

Thursday’s close of 1,385.50-1,386.50 dollars. In other markets: Seoul fell 0.39 percent, or

7.93 points, to 2,029.60 Singapore closed half-day trading 0.19 percent, or 6.02 points, higher

at 3,143.80.

Singapore Airlines fell 0.39 percent to 15.16 Singapore dollars and Singapore

Telecommunications was flat at 3.04 dollars. Taipei fell 0.42 percent, or 37.77 points, to

8,861.10.

Formosa Plastics fell 0.42 percent to 96.3 Taiwan dollars while TSMC was down 0.28

percent to 70.8. Wellington fell 0.14 percent, or 4.55 points, to 3,329.21.

Telecom fell 0.9 percent to 2.22 New Zealand dollars while Fletcher Building shed 1.0

percent to 7.75.

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BIBLIOGRAPHY

Web-sites:

http://en.wikipedia.org/wiki/Euro

www.tradercurrencies.com

www.wisegeek.com

Books:

“International Finance”- By Dipak Abhyankar

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