What is Hard Currency?
Let me explain what hard currency means to you. Hard currency is money issued by a nation that's viewed as politically and economically stable. You'll find these currencies widely accepted around the world for paying for goods and services, and people often prefer them over their own domestic currency.
Understanding Hard Currency
You should know that a hard currency is one that's expected to stay relatively stable over short periods and is highly liquid in the forex or foreign exchange market. The most traded currencies globally 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 earn the trust of international investors and businesses because they don't typically experience sharp depreciations or appreciations.
The U.S. dollar particularly stands out as the world's foreign reserve currency. That's why many international transactions use U.S. dollars. If a country's own currency starts to weaken, its citizens often turn to holding U.S. dollars or other safe haven currencies to safeguard their wealth.
Key Takeaways
- Hard currencies serve as a liquid store of wealth and a safe haven when domestic currencies face challenges.
- They originate from countries with stable economies and political systems.
- The opposite of a hard currency is a soft currency.
Example of Hard Currencies in Action
Consider how hard currencies perform in real scenarios. Within this group, the Canadian and Australian dollars are affected by commodity prices, but they manage these fluctuations better than currencies from countries heavily reliant on commodities. For instance, the 2014 energy price collapse impacted Australian and Canadian markets, but it devastated the Russian ruble far more.
That said, a currency's depreciation usually stems from an increase in money supply or a loss of confidence in its future value due to economic, financial, or governmental issues. Take the Argentinian peso as a stark example of an unstable soft currency—it lost 34.6% of its value against the dollar in 2015, making it unappealing to foreign investors.
A currency's value largely depends on economic fundamentals like gross domestic product (GDP) and employment. The U.S. dollar's international strength mirrors America's GDP, which ranked first globally at $21.37 trillion in 2019 current prices. China and India hold the second and fifth largest GDPs at $14.34 trillion and $2.88 trillion, respectively, yet neither the Chinese yuan nor the Indian rupee qualifies as a hard currency. This highlights how central bank policies, money supply stability, and preferences for mature democracies with transparent legal systems also influence exchange rates.
Downsides of a Hard Currency
Hard currencies hold more value than others, which can have drawbacks. For example, as of November 6, 2020, the forex market showed rates of 6.61 yuan per U.S. dollar and 73.97 rupees per dollar. These rates hurt Chinese and Indian importers but benefit their current account balances. A weak exchange rate aids a country's exporters by making their goods more competitive and cheaper in international markets. In recent years, China has faced accusations of manipulating its exchange rate to lower prices and capture a larger share of global markets.
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