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Xenocurrency is another name for foreign currency — a currency that is traded, invested, deposited, or used outside the country where it’s issued.
So, if you deposit US Dollars with a UK bank, for instance, your money would be denominated in xenocurrency. Similarly, if you trade Euro on the US forex market, your Euro would be a xenocurrency.
The US Dollar is the most popular and most widely traded xenocurrency in the world.
In Zimbabwe, for instance, where hyperinflation made the Zimbabwean Dollar practically worthless, most everyday transactions are paid in US Dollars.
Similarly, the US Dollar is widely used in Mexico, including in large transactions like real estate purchases and other business deals.
The US Dollar is also the world’s reserve currency. This means that most of the foreign currency — or xenocurrency – held by central banks across the world is denominated in US Dollars.
The Euro is the second most widely traded xenocurrency. Andorra, Kosovo, Monaco, Montenegro, San Marino, and Vatican City all use the Euro, despite not being part of the EU.
Investing in xenocurrency
Investments denominated in a xenocurrency can be high risk because of possible foreign exchange fluctuations.
If your local currency goes up in value, your foreign investment will have lower returns when converted. Of course, if your local currency goes down in value, converting your foreign investment would result in a bigger return.
Gains or losses caused by foreign currency fluctuations are known as foreign currency effects.
- Fritz Machlup, an Austrian-American economist, coined the term ‘xenocurrency’ in 1974. He’s also known for introducing the concept of the ‘knowledge-based economy’ in 1962.
- The term ‘xenocurrency’ has fallen out of favour in recent years because of its similarity to the word ‘xenophobia’. The preferred term for a currency that isn’t the local currency has become ‘foreign currency’ or ‘eurocurrency’.
- The ‘xeno’ in xenocurrency is the Greek word for ‘foreign’ or ‘strange’. It’s not the only Greek influence in foreign exchange trading. Some numerical indicators traders use to measure risk are Greek letters, and they’re collectively known as the Greeks.
Want to know more?
- Before the US Dollar became the world’s reserve currency, the most widely traded currency in the world was the Pound Sterling. This European Central Bank working paper investigates when — and why — the US Dollar overtook it.
- Around 60% of the world’s payments are made either in US Dollars or Euro. But it’s the Kuwaiti Dinar that’s regarded as the ‘world’s most powerful currency’. This article explains why.
Assure Hedge’s perspective
‘As a result of globalisation, foreign currencies are more widely traded than ever before. It’s a big opportunity for businesses, investors, and speculators alike. But it’s equally important to make sure you understand the risks and put mitigation strategies such as hedges in place before you dive in.’
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DISCOVER OTHER CONCEPTS IN OUR CURRENCY HEDGING GLOSSARY
A warrant is a type of derivative : a financial instrument that gets its value from an underlying commodity. In foreign exchange transactions, the underlying commodity is a currency pair.
Volatility is a measure of how much the price of an instrument moves. It is usually expressed as an annualised %. It is often calculated as the standard deviation of the daily moves in price of an asset from its average.
US Dollar Index
The US Dollar Index measures the US Dollar’s value relative to a basket of six currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, Swiss Franc.