WHAT IS 'Xenocurrency'

Xenocurrency is a currency that circulates or trades in markets outside of its domestic borders. The term xenocurrency is derived from the Greek prefix "xeno," which literally means foreign or strange. The term is rarely used in markets anymore, perhaps because of the somewhat negative connotation of the word "xeno." Xenophobia, for example, means an irrational fear or hatred of foreigners. Foreign currency, therefore, has become the preferred term when referring to a non-domestic currency.

BREAKING DOWN 'Xenocurrency'

Xenocurrency examples would include the Indian rupee traded in the United States, or Japanese yen deposited in a European bank. The U.S. Dollar is often used as xenocurrency in Mexico, especially for large transactions in real estate and other business activities.

The term xenocurrency was developed in 1974 by Austrian-American economist Fritz Machlup, who served as president of the International Economic Association from 1971 to 1974. Machlup used the phrase xenocurrency to refer to deposits and loans denominated in currencies other than that of the country where the bank is resident.

Xenocurrency investments can be risky, since they are complicated by many factors, such as currency fluctuation and conversion between countries. A rising domestic currency means that foreign investments will result in lower returns when converted back to the domestic currency, and the opposite is true for a declining domestic currency. Foreign currency effects is the phrase used to describe profits or losses on xenocurrency investments due to changes in the relative value of assets denominated in a currency other than a country’s principal currency.

During a currency crisis, a country might place restrictions on the amount of xenocurrency that travelers can take out of the country. For instance, when the Iranian rial plunged to a record low against the U.S. dollar after the U.S. withdrew from the Iran nuclear deal in May 2018, the Central Bank of Iran cut the amount of foreign currency that could be taken from the country in half.

Xenocurrency and Eurocurrency

When xenocurrency is deposited in a bank outside its domestic country, especially if it is deposited in a European country, then xenocurrency may be referred to as eurocurrency. The phrase xenocurrency is frequently used synonymously with eurocurrency, since use of the term eurocurrency does not require that the xenocurrency involve any European countries. For example, Korean won deposited in an American bank by a Korean software manufacturer would still be considered eurocurrency. This form of xenocurrency originally referred more exclusively to non-European deposits held in European banks, but it is now used more generically. Similarly, the phrase xenomarket is often used interchangeably with eurocurrency market, which refers to a money market in which xenocurrency is traded. Eurocurrency is frequently used in international trade and to make international loans.

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