Xenocurrency

DEFINITION of Xenocurrency

Xenocurrency is a currency that trades in foreign markets.

WHAT IT IS IN ESSENCE

It is a currency in use outside of the national borders of the issuing country. An example of a xenocurrency is the U.S. dollar in Mexico. The U.S. Dollar is used as often as the Mexican Peso along the entire border territory with Mexico and is widely used for large transactions in real estate and other business endeavors.

Or Euros trade in American markets, making the Euro a xenocurrency.

It is basically a foreign currency. The world is full of xenocurrencies thanks to a variety of healthy capital markets.

The name sounds a bit strange, but that is because the root word “Xeno” means foreign or strange, hence the name xenocurrency.  When a xenocurrency is deposited in another country, it is called and quoted in euro currency as the Euro is the most valuable currency in the world.  It was once feared that inflation would be on the rise because there were too many central banks holding part of their reserves in xenocurrencies. Banks got involved in the practice in the first place because reserve requirements and interest rate restrictions were not subjected to domestic banking regulations.

This term was developed in 1974 by Austrian-American economist Fritz Machlup. Machlup used the phrase to refer to deposits and loans denominated in currencies other than that of the country where the bank is resident.

HOW TO USE

Xenocurrency investments can be risky. They are difficult due to many factors, including currency changes and exchange risks.

The point where the risks come is when deposits are in a rising domestic currency market. So the foreign investment may occur in lower returns when turning the funds back into the home currency. Still, it is the opposite is valid for investments in descending domestic currency. These risks are well-known as foreign currency effects.