What is Hard Currency – Working, Benefits and Examples
Across the globe, money can be classified as either hard currency or soft currency. Hard currency is issued by the government that is considered relatively safe and stable in other countries. Depending on the fact that the currency is hard or soft, investors can understand if a particular currency is stable for investment and capital or not. All nations and investors find hard currency tradable and reliable.
If you are curious to know about hard currency, here’s an interesting detailed blog that helps understand the meaning of hard currency, its examples, benefits and the factors that affect the status of hard currency. Read on!
What is Hard Currency?
Usually, developed countries issue hard currency, and this currency is easier to trade and receive funds from other countries or investors from other nations. The primary attributes of hard currency are:
- Hard currency means a stable currency, and its value does not fluctuate much in the international markets. It makes hard money currency easily tradable.
- It is issued by a sound economy. Developed countries issue hard currency and it is accepted by all nations across the world.
- It is highly liquid and several countries prefer to accept hard currency instead of local currency as it has lesser fluctuations and can be easily converted to local currency.
- Hard currency is universally accepted and international investors have a sense of faith in hard currency for trading.
- Countries across the globe consider hard currency as a foreign currency reserve, further adding to its value.
- As hard currency is easily convertible and stable, it is widely used in international exchanges.
- The value of the hard currency does not change much in response to global events.
- When domestic currencies struggle, people start holding on to hard currencies to protect their wealth.
How Does Hard Currency Work?
Countries and traders from different countries do high-volume transactions and trades using hard currency. A country with a high GDP and employment may not produce hard money currency if it has no political stability in the country. China is one such country that does not produce hard currency even though it is economically strong.
The value of the hard currency does not appreciate or depreciate much even if there are major changes in the country or the world. Dramatic events like civil unrest, a rise in unemployment or a change in the government do not affect the value of the hard currency. When a currency is stable to this extent, you can identify it as hard money currency.
One of the most significant and strongest hard currency examples is the U.S. Dollar. When there was major economic and political unrest in the U.S. in 2020 and events like COVID-19, a failing economy, and nationwide unrest due to the Black Lives Matter movement were affecting the U.S., the U.S. Dollar still stood strong and held a better position than it had in the previous year. Since the U.S. dollar is considered safe and stable globally, international investors and countries were flocking to increase their U.S. dollar reserves during these times of global unrest and chaos, further adding to its value in 2020.
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Examples of Hard Currency
The hard currency list includes multiple currencies, which are:
- The U.S. Dollar (USD)
- The European Euro (EUR)
- The Japanese Yen (JPY)
- The British Pound Sterling (GBP)
- The Australian Dollar (AUD)
- The Swiss Franc (CHF)
- The Canadian Dollar (CAD)
- The New Zealand Dollar (NZD)
These currencies have the faith of businesses and economies across the world because they are not vulnerable to high-volume fluctuations in their valuation.
Among these hard currencies, the Canadian and the Australian dollars are affected by commodity prices, but they are much less volatile than other currencies that depend on commodities. For example, when the energy prices collapsed in 2014, the effect on the Canadian and Australian dollar was much less than the Russian ruble.
A few examples of soft currencies are as follows:
- The Venezuelan bolivar (VEF)
- The Zimbabwe dollar (ZWL)
- Syrian pound (SYP)
- Turkish lira (TRY)
- West African franc (CFA)
- Egyptian pound (EGP)
What Factors Affect Hard Currency Status?
Stability and liquidity are the two primary elements of a hard currency. Investors and countries expect the hard currency to remain unaffected and neutral to events and exhibit short-term and long-term stability. Only an economically and politically stable nation can produce hard currency and several factors affect the hard currency status.
- A country issuing hard currency should have reliable and stable legal institutions and bureaucracy.
- The political and fiscal climate of the country should be stable.
- There should be long-term purchasing power stability in the country issuing hard currency.
- The issuing country’s policies formulated by its central bank affect its hard money currency.
- The military and social stability in a country affect its hard currency.
- The level of corruption at every level of the government is also a determinant of the country’s hard currency.
Advantages of Hard Currency
There are several advantages of hard currency:
- Hard currencies lead to cheaper travel. Since the value of hard currencies is higher, it gives more buying power to countries having soft currencies. You can travel from a country having hard currency to a country having soft currency and enjoy a lavish and extended vacation with the high value the hard currency offers in this country.
- Hard currency makes imported goods cheaper. Businessmen from countries having hard currencies often import products from countries having soft currencies. When the soft currency of the manufacturer’s country depreciates, the goods become cheaper, giving more disposable income to people living in the country having a hard currency.
- Traders benefit from the exchange of goods. When traders from a country having a soft currency conduct trade with a hard currency country, the traders benefit when the hard currency becomes stronger and its value increases. When these traders sell goods in a hard currency country and bring back the money to their home country, they gain a lot from the exchange rate in their country.
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Disadvantages of Hard Currency
There are a few drawbacks of hard currency too:
- Domestic travel becomes more expensive when international travel becomes cheaper. Therefore, domestic travel is relatively more expensive in countries having hard currency, unless the government takes measures to regulate it.
- Exports become expensive when imports become cheaper. When traders from a high currency country export goods to a soft currency country, they make less money comparatively.
- Developing countries have to maintain hard currency reserves to maintain economic stability in their country. When the value of hard currency increases, these developing countries are forced to pay more money to get the hard currency.
Hard Currency vs Soft Currency – A Quick Comparison
| Hard Currency | Soft Currency |
| Hard currency is a stable and reliable issued by the government of countries having a stable political and economic setup | Soft currency is an unstable currency that is difficult to convert and fluctuates drastically with changes in the social, political, and economic environment |
| The impact of economic highs and lows is not felt in the long term or in a high magnitude for countries issuing hard currency | The economic highs and lows impose severe and long-term effects on the economy of a soft currency country. |
| The economy of countries issuing hard currency is diversified enough to absorb unfavourable economic impacts | The economy of a country issuing soft currency is not diversified enough to mitigate the negative economic impact on the economy. The currency of such a country is extremely volatile in the forex market |
| When there is a negative sentiment in the market, investors and countries get more hard currency to remain financially safe. | During negative times in the market, investors and nations exchange their soft currency with hard currency that offers less volatility and more liquidity. |
The comparison of hard currency and soft currency can be understood from the following comparison of several Soft currencies against the U.S dollar:
- USD vs. VEF: You can exchange one U.S. dollar with almost 10 Venezuelan bolivars.
- USD vs. ZWL: You can exchange one U.S. dollar with approximately 362 Zimbabwe dollars.
- USD vs. SYP: You can exchange one U.S. dollar with almost 512 Syrian pounds.
- USD vs. TRY: You can exchange one U.S. dollar with approximately 8 Turkish lira.
- USD vs. CFA: You can exchange one U.S. dollar with approximately 557 West African francs.
- USD vs. EGP: You can exchange one U.S. dollar with approximately 16 Egyptian pounds.
Final Word
Hard currencies have a higher value than other currencies of the world and are regarded as safer and more tradable than soft currencies. The U.S. dollar is the most widely accepted hard currency. Countries having political and economic stability and strong bureaucracy and legal systems issue hard currencies.
FAQs
Ans: Hard currency is a type of currency issued by the government which is considered relatively safe and stable than other countries
Ans: There are several strong hard currencies like the Euro and the Pound, but the U.S. dollar is the most used hard currency.
Ans: Company code currency, Group currency, Index based currency, Global company currency, and Hard currency SAP.
Ans: Hard currency debt is a foreign loan that the borrower needs to return in the hard currency of a country with better political and economic setups.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
