What is Hard Currency?
Hard currency refers to the currency of a nation recognized for its political and economic stability. It is widely accepted internationally for the exchange of goods and services and is often preferred over local currencies.
Understanding Hard Currency
A hard currency is expected to maintain relative stability over short periods and is highly liquid in the foreign exchange (forex) market. Some of the most traded currencies globally include the U.S. dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), and the Australian dollar (AUD). These currencies are trusted by global investors and businesses because they typically avoid extreme fluctuations in value.
The U.S. dollar holds a unique position as the world’s primary reserve currency. As a result, many international transactions are conducted in USD. Additionally, when a country’s currency weakens, people often shift to holding U.S. dollars or other stable currencies to safeguard their wealth.
Examples of Hard Currencies in Action
Within the group of hard currencies, the Canadian and Australian dollars tend to be influenced by commodity prices but handle fluctuations better than other commodity-dependent countries. For instance, the collapse of energy prices in 2014 negatively impacted both the Australian and Canadian economies, but the Russian ruble was hit much harder. Typically, a currency’s depreciation is linked to an increased money supply or a loss of confidence in its value due to economic, financial, or political instability. A notable example of a volatile, or soft, currency is the Argentine peso, which lost 34.6% of its value against the U.S. dollar in 2015, making it less attractive to foreign investors.
A currency’s value is largely influenced by economic factors such as gross domestic product (GDP) and employment levels. The global strength of the U.S. dollar reflects the size of the American economy, which, as of 2019, ranked first in the world with a GDP of $21.37 trillion. While China and India are among the largest economies, with GDPs of $14.34 trillion and $2.88 trillion respectively, neither the Chinese yuan nor the Indian rupee is classified as a hard currency. This highlights the importance of central bank policies and the stability of a nation’s monetary system in determining currency strength. Additionally, there is a clear preference for currencies from mature democracies with transparent legal frameworks.
Downsides of a Hard Currency
Hard currencies tend to hold more value compared to other currencies. For example, on Nov. 6, 2020, the foreign exchange market saw the U.S. dollar trading at 6.61 yuan and 73.97 rupees per dollar. These exchange rates can be unfavorable for Chinese and Indian importers but beneficial for their current account balances. A weaker currency benefits exporters by making their goods more competitive, as lower prices make exports more attractive in global markets. In recent years, China has been accused of manipulating its currency to keep prices lower, thereby increasing its share in international markets.
