What is ‘Hard Currency’
A hard currency generally comes from a country with a strong economic and political situation. It is widely accepted around the world as a form of payment for goods and services. A hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid in the forex or foreign exchange (FX) market.
BREAKING DOWN ‘Hard Currency’
The eight most tradable currencies in the world are the U.S. dollar (USD), European euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), Australian/New Zealand dollar (AUD/NZD) and South African rand (ZAR). The U.S. dollar enjoys status as the world’s foreign reserve currency, the reason it is used in 70% of international trade transactions.
All of these currencies garner the confidence of international investors and businesses because they are not prone to dramatic depreciation or appreciation. A depreciation in a nation’s currency is the result of either an increase in the money supply or a loss of confidence in its future ability as a store of constant value, because of either economic, financial or governmental concerns. A striking example of an unstable or a soft currency is the Argentinian peso, which in 2015, lost 34.6% of its value against the dollar, making it highly unattractive to foreign investors.
The value of a currency is mostly based off of economic fundamentals such as gross domestic product (GDP) and employment. The international strength of the U.S. dollar is reflective of America’s GDP which, as of 2016 current prices, stands first in the world at $18.57 trillion. China and India have the second and seventh, respectively, ranked GDPs in the world at $11.199 trillion and $2.2641 trillion, but neither the Chinese yuan nor the Indian rupee is considered a hard currency. This underscores how central bank policies and stability in a country’s money supply also factor into exchange rates.
One measure of a hard currency is liquidity in the FX market.
Downsides of a Hard Currency
Hard currencies are more valuable than other currencies. For instance, as of February 13, 2018, the FX market trades at a rate of 6.34 yuan per U.S. dollar and 64.27 rupee per dollar. These exchange rates are detrimental for Chinese and Indian importers but positive for current account balances. A weak exchange rate helps a country’s exporters because it makes exports more competitive (or cheaper) in international commodity and other markets. In recent years, China has faced accusations of manipulating its exchange rate to deflate prices and seize a greater share of international markets.