DEFINITION: The term “xenocurrency” refers to a currency that is used outside of the national boundaries of the country that issued it.

In the US, xenocurrency is usually called “foreign currency.” However, that usage assumes a provincial US perspective.

The term “xenocurrency” may be applied with equal validity to any country whose currency is traded in other countries.

ETYMOLOGY: The term “xenocurrency” seems to have been introduced by the Austrian school economist Fritz Machlup in 1974.

The English term “xenocurrency” is compounded from two component parts:

  1. The Greek adjective xenos, meaning “foreign”;
  2. The English word “currency” is attested from the turn of the eighteenth century; the related adjective “current” derives, via Middle English curraunt, from the Old French present participle curant of the verb courre, meaning “to run,” which, in turn, derives from the Latin verb curro, currere, also meaning “to run.”

USAGE: Even though the term “xenocurrency” was introduced in the first place precisely to avoid taking a US-centric point of view for granted, it has fallen out of favor more recently.

This is probably due to the general aura of negativity attached to the Greek root xeno– among modern people, who have not had the benefit of a classical education and who recognize the root only from the pejorative term “xenophobia.”

Whatever the reason, the fact is that the ethnically neutral term “xenocurrency” is now used relatively infrequently, while the ethnocentric term “foreign currency” has regained its former status as the preferred term for referring to currencies that circulate widely outside their borders.

This is doubly regrettable in that, when the term “foreign currency” is employed by an American national, the US dollar is naturally assumed to be meant. How, then, is one supposed to refer to the euro, say, or the Japanese yen?

It is important to note that investing in xenocurrencies carries some risk due to their inherent complexity, including volatility and uncertainty surrounding conversion rates. How so?

For one thing, risk arises when deposits are made in a strengthening domestic currency market, because reconversion of the invested funds back to the native currency may result in lower returns or losses.

On the other hand, investments in a weakening domestic currency may have the opposite effect, leading to higher profits.

These types of uncertainties and risks are commonly referred to as “foreign currency effects.”

Political risks may also play a role in xenocurrency investments. For example, in a crisis a nation’s government might impose limitations on the quantity of xenocurrency that travelers are allowed to take out of the country.

Moreover, in some contexts, the term “xenocurrency” may be used as a synonym for the euro. Similarly, the phrase “xenomarket” is sometimes used interchangeably with “eurocurrency market.”

The eurocurrency market denotes a financial market where trading involves xenocurrency. This market may consist of participating banks, mutual funds, hedge funds, and multinational corporations.

Such lending institutions turn to the eurocurrency market in an attempt to bypass interest rate limitations, tax regulations, and other regulatory constraints that frequently apply to domestic banking, especially in the US.