Since World War II, international trade and foreign direct investment have grown. This implies that countries, banks and firms need a quick and easy method of raising foreign currencies to finance imports and, in less savory moods, to speculate on potential currency appreciations. The purpose of an international money or capital market is to facilitate the borrowing of foreign currencies to make international transactions easier.
Facilitating Foreign Trade
Without international money markets, foreign trade and international business would be very difficult. These markets make it possible for countries to retain their own currencies while permitting the smooth operation of international transactions. If an English firm needs to pay a supplier in Japan, it can take out a loan in yen from the euro-currency market. This makes doing business in Japan easy. Even more, if there are any shortfalls in domestic capital, the firm can borrow abroad. If the borrowed currency depreciates, then the cost of doing business in that currency gets cheaper.
International money markets are constantly exchanging one currency for another. One often overlooked benefit to this is the eventual equilibrium, or convergence, of currencies. Removing currency speculation from the equation, the constant exchange of currencies in international business and finance will ultimately even out the demand for the specific major currencies most commonly used. This is because businesses will finance cheaper imports in the importing country's currency, which, in turn, will drive up its value. Once this happens, demand for that currency will fall. All other things being equal, this leads to currency equilibrium. Equilibrium and convergence equalizes currency values over time, making the markets more stable and predictable.
Lower Rates and Risk
Rates in international markets are normally lower than domestic sources of capital. This is largely because there are many major firms and banks involved in these transactions, creating an inherent stability in the market. In addition, given the fact that there are many currencies involved in many transactions, the overall risk is lower to the lending institution, since any fluctuations in the currencies and the local markets are balanced out by the others.
International capital markets like euro-currency are under no capitalization restrictions. This means there are no required reserves for all institutions to maintain to cushion their risk. As a result, these markets can lend 100 percent of their deposits, which is possible given the lack of risk in comparison to purely domestic institutions. Given the fact that international trade continues to grow, international markets continue to appear as a good bet to hedge against the possibility of local currency appreciation or market recessions.
Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."