What is Xenocurrency?
The term xenocurrency refers to any currency traded in markets outside its domestic borders. The name derives from the Greek prefix “xeno,” meaning “foreign.”
These days, the term xenocurrency is less frequently used, largely due to the negative associations of the prefix xeno in modern English, such as seen in the word xenophobia. Consequently, the term foreign currency is now more commonly employed to describe non-domestic currencies.
Key Takeaways
- Xenocurrency refers to a currency deposited or exchanged in a market outside its country of origin.
- Today, terms like “eurocurrency” or “foreign currency” are more commonly used.
- Currency transactions involving xenocurrencies are increasingly prevalent, influenced by the globalization of supply chains and financial markets.
How Xenocurrencies Work
The concept of xenocurrency was first introduced in 1974 by Austrian-American economist Fritz Machlup, who was President of the International Economic Association from 1971 to 1974. Machlup used the term to describe deposits and loans denominated in currencies other than that of the bank’s home country.
Investing in xenocurrency can be risky, influenced by factors like currency fluctuations and conversion risks. Risks are heightened in a rising domestic currency market, where foreign investments may result in lower returns when converting back to the home currency. Conversely, declining domestic currency can offer profitable returns. Collectively, these risks are known as foreign currency effects.
Political turmoil can further complicate xenocurrency investments. For example, during a political crisis, a government might impose restrictions on the amount of xenocurrency that travelers can take out of the country. A case in point occurred after the U.S. withdrew from the Iran nuclear deal in May 2018, causing the Iranian rial to plummet to record lows against the U.S. dollar.
Real-World Examples of Xenocurrency
Examples of xenocurrencies include the Indian rupee (INR) traded in the United States or the Japanese yen (JPY) deposited into a European bank. Moreover, the U.S. Dollar (USD) is commonly utilized as xenocurrency in Mexico, especially in significant transactions such as real estate or business activities.
Today, xenocurrency is often synonymous with eurocurrency. Similarly, the term xeno-market is frequently used interchangeably with the eurocurrency-market. The eurocurrency-market trades xenocurrencies and is utilized by organizations such as banks, multinational corporations, mutual funds, and hedge funds. These entities are attracted to the market for its advantages in circumventing regulatory requirements, tax laws, and interest rate limits commonplace in domestic banking systems, particularly within the United States.
Caution: Investing involves risks, including potential loss of principal. It’s advisable to seek professional financial advice tailored to your specific circumstances.
Related Terms: Foreign currency effects, Political risks, Eurocurrency-market.
References
- International Monetary Fund eLibrary. “Balance of Payments Financing and Reserve Creation”.
- Internatinal Economic Association. “About the IEA”.
- Congressional Research Service. “Iran Sanctions”,
- XE. “IRR to USD Chart”.
