What Is a Xenocurrency?
The term xenocurrency alludes to any currency that is traded in markets outside of its domestic boundaries. Its name gets from the Greek prefix "xeno," signifying "foreign."
Today, the utilization of the term xenocurrency is rare as the prefix xeno can have negative undertones in modern English. Xenophobia, for instance, means an irrational fear of or scorn toward foreigners. Foreign currency, accordingly, has turned into the preferred term for alluding to non-domestic currencies.
How Xenocurrencies Work
The term xenocurrency was developed in 1974 by the Austrian-American economist Fritz Machlup, who filled in as President of the International Economic Association from 1971 to 1974. Machlup utilized the phrase to allude to deposits and loans named in currencies other than that of the bank's nation of origin.
Xenocurrency investments can be unsafe, since they are muddled by many factors, including currency changes and conversion risks. Risks come when deposits are in a rising domestic currency market, where the foreign investment might bring about lower returns while changing over the funds once more into the home currency. In any case, the inverse is substantial for investments in declining domestic currency. Altogether, these risks are known as foreign currency effects.
Political risks can likewise be a factor. During a crisis, a country's government could place limitations on the amount of xenocurrency that explorers might remove from the country. For example, after the U.S. pulled out from the Iran nuclear deal in May 2018, the Iranian rial plunged to a record low against the U.S. dollar.
Real World Example of a Xenocurrency
Instances of xenocurrencies incorporate the Indian rupee (INR) traded in the United States or the Japanese yen (JPY) saved into an European bank. The U.S. Dollar (USD) is moreover frequently utilized as xenocurrency in Mexico, particularly for large transactions in real estate and other business activities.
Today, the term xenocurrency is every now and again utilized equivalently with euro currency. Essentially, the phrase xeno-market is frequently utilized reciprocally with the term eurocurrency-market. Eurocurrency-market alludes to a money market that trades in xenocurrency. Banks, multinational corporations, mutual funds, and hedge funds utilize the eurocurrency market. These elements utilize the market since they wish to avoid regulatory requirements, tax laws and interest rate covers frequently present in domestic banking, especially in the United States.
- Today, the term "eurocurrency" or "foreign currency" is all the more often utilized.
- These types of currency transactions have become progressively common, driven by the globalization of supply chains and financial markets.
- A xenocurrency is a currency stored or traded in a market outside its country of beginning.