What is hard currency? Definition and meaning
The definition and meaning of hard currency is a currency that everybody trusts because it is expected to maintain its value, or even appreciate against softer currencies – it does not suffer from frequent, sharp exchange rate fluctuations. People prefer to use a hard currency for international transactions. It is stable, convertible, and enjoys the confidence of investors, traders and tourists.
The terms safe-haven currency and strong currency have the same meaning as hard currency. The term can use a countable or uncountable noun, i.e. you can say ‘hard currency’ or ‘a hard currency’.
The youngest hard currency is the euro, which became the official currency of several European Union nations at the end of the last century.
According to The Free Dictionary, a hard currency by definition is:
“A currency that is issued by a politically and economically stable country and is therefore well-respected in FX trade. Large, international transactions are often settled in one hard currency or other.”
“The market to buy and sell hard currencies is especially liquid, even by the standards of foreign exchange trading. The price of a hard currency often remains stable in the short-term.”
The three main factors contributing to a hard currency’s status are:
– the policy position of its central bank,
– its country’s political and fiscal condition and outlook, and
– its long-term stability and purchasing power.
Although the US dollar is by far the world’s favorite foreign exchange reserve currency, over the past couple of decades this figure has been steadily declining. (Source: babypips.com)
Hard currency vs. soft currency
It is the opposite of a soft currency or weak currency, one that is expected to fluctuate erratically or lose its value against other currencies.
A currency can depreciate because the money supply of that nation increased, or there is a loss of confidence in its ability to maintain a constant value, either because of political, economic or financial concerns.
The Venezuelan bolivar is a striking example today of a soft currency – just in November 2016, its black market value declined by 60%, which is an annual rate (when compounded) of 28,000%.
Today’s hard currencies include the US dollar, Euro, British pound sterling, Japanese yen, Swiss franc, Australian Dollar, and Canadian dollar.
You can tell how much a hard currency is favored by looking at the foreign-exchange reserves of nations, which today are (in order): the US dollar, the euro, the British pound sterling, and the Japanese Yen.
The US dollar, the world’s number one foreign reserve currency, is currently used in seventy percent of all international trade transactions.
A hard currency is seen as a safe haven for people, companies and governments in unstable economies. Paul Singer, an American hedge fund manager and activist investor, believes that the notion of ‘safe haven’ today is a myth. In 2016, Mr. Singer’s net worth was estimated to be $2.2 billion by Forbes. (Image: adapted from Wikipedia)
Different adjectives for currencies
– Hard Currency: an international currency that is easy to exchange, people have confidence in it, and expect it to keep its value.
– Soft Currency: one that fluctuates erratically, and is expected to depreciate in value versus the hard currencies.
– Hot Currency: any hard currency that is exciting the forex markets at the moment. When a country is struck by a financial crisis, the US dollar, euro, pound sterling or Swiss franc becomes its ‘hot currency’; the currency everybody in that country wants.
On June 23rd, 2016, Britons voted for Brexit (Britain Exit the EU) in a referendum. The pound sterling immediately dropped and has not returned to its pre-June 23rd level. Whether sterling continues as a strong currency depends on what kind of trade deal the UK government can negotiate with the European Union.
– Heated Currency: a currency that is under pressure of depreciation.
– Cheap Currency: a term used by British economist John Maynard Keynes (1883-1946). When a government begins repurchasing its bonds before they mature, the money supply increases. As the money supply grows, money becomes cheap – hence its name, ‘cheap money’ or ‘cheap currency’.
– Dear Currency: when the money supply declines because the government issues bonds, money becomes dearer. It can also refer to a currency that is currently undervalued.
A hard loan, as opposed to a soft loan, has to be paid back in a hard currency.
Video – Pegging to a hard currency – Definition and Meaning
This MarketPlace video talks about pegging – when a country fixes its currency to a hard currency – and what happens when it unpegs.