The term xenocurrency refers to any currency that is traded in markets outside of its domestic borders. Its name derives from the Greek prefix “xeno,” meaning “foreign.”
How Xenocurrencies Work
The term xenocurrency was developed in 1974 by the Austrian-American economist Fritz Machlup, who served as President of the International Economic Association from 1971 to 1974.12
Xenocurrency investments can be risky, since they are complicated by many factors, including currency fluctuations and conversion risks. Risks come when deposits are in a rising domestic currency market, where foreign investment may result in lower returns when converting the funds back into the home currency. However, the opposite is valid for investments in declining domestic currency. Collectively, these risks are known as foreign currency effects.
Political risks can also be a factor. During a crisis, a country’s government might place restrictions on the amount of xenocurrency that travelers may take out of the country. For instance, after the U.S. withdrew from the Iran nuclear deal in May 2018,3 the Iranian rial plunged to a record low against the U.S. dollar.
Real World Example of a Xenocurrency
Examples of xenocurrencies include the Indian rupee (INR) traded in the United States or the Japanese yen (JPY) deposited into a European bank. The U.S. Dollar (USD) is likewise often used as xenocurrency in Mexico, especially for large transactions in real estate and other business activities.
Today, the term xenocurrency is frequently used synonymously with the euro currency. Similarly, the phrase xeno-market is often used interchangeably with the term eurocurrency-market. The eurocurrency market refers to a money market that trades in xenocurrency. Banks, multinational corporations, mutual funds, and hedge funds use the euro currency market. These entities use the market because they wish to circumvent regulatory requirements, tax laws and interest rate caps often present in domestic banking, particularly in the United States.