Hard currency refers to money that is issued by a nation seen as politically and economically stable. These currencies are widely accepted around the world as a form of payment for goods and services and are often preferred over domestic currencies.
Understanding Hard Currency
A hard currency remains relatively stable over a short period and is highly liquid in the foreign exchange (FX) market. The most tradable currencies worldwide include the U.S. dollar (USD), European euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), and Australian dollar (AUD). These currencies are trusted by international investors and businesses because they are not prone to dramatic depreciation or appreciation.
The U.S. dollar is particularly notable as it enjoys the status of the world’s foreign reserve currency. Consequently, many international transactions are conducted in U.S. dollars. Moreover, if a country’s currency begins to depreciate, citizens often hold U.S. dollars and other safe haven currencies to preserve their wealth.
Key Takeaways
- Hard currencies act as a liquid store of wealth and a safe haven when domestic currencies falter.
- Hard currencies originate from countries with stable economies and political systems.
- The opposite of hard currency is a soft currency.
Example of Hard Currencies in Action
Within the hard currency group, the Canadian and Australian dollars are sensitive to commodity prices but handle these dips better than countries more reliant on commodities. For example, the collapse of energy prices in 2014 harmed both the Australian and Canadian markets but was far more devastating for the Russian ruble. A nation’s currency usually depreciates due to an increase in the money supply or a loss of confidence in its stability owing to economic, financial, or governmental concerns. A striking example of a soft currency is the Argentinian peso, which lost 34.6% of its value against the dollar in 2015, making it highly unattractive to foreign investors.
The value of a currency is largely driven by economic fundamentals, such as gross domestic product (GDP) and employment. The international strength of the U.S. dollar reflects America’s GDP, which stood at $21.37 trillion as of 2019. Despite China and India having the second and fifth largest GDPs, their currencies (the Chinese yuan and the Indian rupee) are not considered hard currencies. This indicates that central bank policies and a stable money supply also play significant roles in determining exchange rates, alongside a preference for mature democracies with transparent legal systems.
Downsides of a Hard Currency
Hard currencies are generally more valuable than others. For instance, as of Nov. 6, 2020, the FX market traded at a rate of 6.61 yuan per U.S. dollar and 73.97 rupees per dollar. These exchange rates can be detrimental for Chinese and Indian importers but beneficial for their current account balances. A weak exchange rate can help a country’s exporters by making their exports more competitive in global markets. In recent years, China has faced accusations of manipulating its exchange rate to deflate prices and capture a larger share of international markets.
Related Terms: soft currency, forex, reserve currency, money supply, exchange rate.
References
- Bank for International Settlements. “Turnover of OTC Foreign Exchange Instruments by Currency”.
- International Monetary Fund. “Currency Composition of Foreign Exchange Reserves”.
- Yahoo! Finance. “USD/ARS (ARS=X)”.
- The World Bank. “GDP 2019 (Current US$)”.
- Yahoo! Finance. “USD/CNY (CNY=X)”.
- Yahoo! Finance. “USD/INR (INR=X)”.
