What do we mean by currency and international payments? Well, there are two main types. Firstly, there is the payment of a single currency across a border. The receiver receives units of the same currency that the sender sends. For example, someone sends USD across a border and someone else receives USD. This means the USD is either leaving its domestic currency zone (in this case the USA), or it is returning to its domestic currency zone, or it is moving between two countries outside its domestic currency zone (e.g., between the UK and Singapore).
Secondly, in currency and international payments, there is the transfer of value across borders, with foreign exchange, where the sender and receiver are working in different currencies. For example, the sender has GBP removed from her GBP account in the UK and the receiver has SGD added to her SGD account in Singapore. By exploring these concepts separately we will see that money, in general, does not leave its domestic currency zone. As we have seen, there is no central bank of the world to clear international commercial payments, so we have to fall back to the less efficient correspondent banking systems where banks maintain accounts with each other.
Currency and international payments - Single Currency Transfers Across a Border
Have you ever thought about how your bank can offer you a current account in a currency from a jurisdiction where your bank doesn’t have a banking license? How does it do that? How does it receive and make payments? The answer, as you might have guessed by now, is that the bank has an account with a correspondent bank licensed in the country of the currency. For example, a Singapore bank may not have a banking license in the UK.
If it wishes to offer to hold GBP for its customers, it will maintain a GBP-denominated account (a nostro) with a major bank in the UK, preferably a clearing bank, and it will then use that as a mega account (called an ‘omnibus’ account) for all its customers’ GBP currency.
Currency and international payments - Euro-currencies
Reality is always more complicated than theory, especially in banking. Currency and international payments can actually be created and exist outside of their domestic zones or home jurisdictions. Examples are ‘Euro-currencies,’ e.g., Eurodollar, Euro-euro, and Euro-sterling. The Euro-prefix originated from Europe the region, and should not be confused with:
- the Euro currency (€) itself, or
- the terminology used in foreign exchange (FX) trading.
‘Euro/dollar’ refers to the exchange rate between Euros and dollars. In this context of currency and international payments, the prefix ‘Euro’ indicates that the currency exists outside of its home zone. It was first used when the first USD loan was created outside of the USA, in Europe. So, Euro-dollar, Euro-sterling, and Euro mean, respectively, a US dollar that exists outside the USA, a British pound that exists outside the UK, and a Euro that exists outside the Eurozone.
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