What Is a Xenocurrency?
Let me explain what a xenocurrency is: it's any currency that's traded in markets outside its own country's borders. The name comes from the Greek prefix 'xeno,' which means 'foreign.'
These days, you won't hear the term xenocurrency used much because 'xeno' can carry negative vibes in English, like in 'xenophobia,' which is an irrational fear or hatred of foreigners. So, people prefer to call it foreign currency when talking about currencies from other countries.
Key Takeaways
- A xenocurrency is a currency deposited or exchanged in a market outside its country of origin.
- Today, the term “eurocurrency” or “foreign currency” is more frequently used.
- These types of currency transactions have become increasingly common, driven by the globalization of supply chains and financial markets.
How Xenocurrencies Work
The term xenocurrency was created in 1974 by Fritz Machlup, an Austrian-American economist who was President of the International Economic Association from 1971 to 1974. He used it to describe deposits and loans in currencies other than the bank's home country.
When you invest in xenocurrencies, you're taking on some risks because they're affected by things like currency fluctuations and conversion issues. For example, if you deposit in a rising domestic currency market, your foreign investment might give you lower returns when you convert back to your home currency. But if the domestic currency is declining, the opposite happens. All these are part of what's called foreign currency effects.
Political risks are also involved. In a crisis, a government might limit how much xenocurrency you can take out of the country. Take what happened after the US withdrew from the Iran nuclear deal in May 2018—the Iranian rial hit a record low against the US dollar.
Real World Example of a Xenocurrency
You'll see xenocurrencies in action with things like the Indian rupee (INR) being traded in the United States or the Japanese yen (JPY) deposited in a European bank. The US Dollar (USD) is often used as a xenocurrency in Mexico, especially for big real estate deals or other business activities.
Nowadays, xenocurrency is basically the same as eurocurrency. The term xeno-market is used interchangeably with eurocurrency-market, which is a money market dealing in xenocurrencies. Banks, multinational corporations, mutual funds, and hedge funds all use this market to avoid regulatory requirements, tax laws, and interest rate caps that are common in domestic banking, especially in the United States.
Important Note
Remember, this is not tax, investment, or financial advice. The information here doesn't consider your specific investment objectives, financial situation, or needs. Investing always involves risk, including the possible loss of principal.
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