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The Impact Of The Euro On Financial Markets And Their Participants

2818 words - 11 pages

This essay is intended to evaluate the impact of the European single currency since its inauguration on 1st January 1999. In part a) I will identify and explain the impact of the Euro since its introduction on the foreign exchange, bond, equity and Eurocurrency markets. Part b) will concentrate on the implications of change on differing groups of participants or potential participants in these markets.PART AThe Foreign Exchange MarketThe disappearance of 12 sovereign currencies and the increased mergers and acquisition between Euro zone banks instigated by the introduction of the Euro has led to a reduced volume in trade within the foreign exchange market (as the number of participants and the markets they trade across decreased).Foreign exchange average daily turnover has also declined, from 1998 figures of $1.4bn to 2001 figures of $1.2bn [Joshua Rosenberg - Federal Reserve Bank of New York (2002)] , although it is quite probable that other factors such as the economic downturn and mergers & acquisition (M&A) activity (which may compensate by increasing market liquidity) are in part responsible for such a decline in figures. Various studies have been undertaken regarding the influence of the Euro, with the overall conclusion being that the behaviour of the Euro, in terms of bid-ask spreads, volatility and trading activity correlates to that of the Deutsch mark.Statistics obtained from the Bank of International Settlements (BIS) showed that since the introduction of the Euro the dollar has slightly strengthened its position as the global vehicle currency (used when central banks wish to intervene in the market), being accountable in 91% of all foreign transactions. The Euro presence existed in 38% of trades (30% of which were trades against the dollar), slightly gaining on the total sovereign currency presence that used to exist.Since Jan 1st 1999 it has been seen that the value of the Euro has depreciated significantly against other major currencies such as sterling and dollar. This weakness could well have dissuaded governments (especially in Lower Developed Countries) to transfer some of their reserve holdings into Euros. Therefore it could be acknowledged that should the Euro recover its exchange rate position and eliminate the relative volatility, such countries could substantially rebalance their reserve portfolio.The Bond MarketsThe coming together of the 12 national bond markets into a singular entity (one European market in bonds denominated in Euros) has created a market with the ability to rival the US Treasury in terms of becoming a global benchmark. Whilst the overall size of the Euro-denominated bond market is still significantly smaller than its US counterpart at 6623bn, there is strong expectation that the increased breadth and depth of the market is likely to "double the size of the US Treasury market in five to ten years" [Mark Holder, Chicago Board of Trade]*Government BondsSince joining the EMU members have seen...

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