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Hard currency or strong currency, in economics, refers to a globally traded currency that can serve as a reliable and stable store of value. Factors contributing to a currency's hard status can include political stability, low inflation, consistent monetary and fiscal policies, backing by reserves of precious metals, and long-term stable or upward-trending valuation against other currencies on a trade-weighted basis.

As of 2008, hard currencies could be argued to include the United States dollar, euro, Swiss franc, British pound sterling, Norwegian krone, Swedish krona, Canadian dollar, Japanese yen, and Australian dollar. However, varying theories of monetary policy preclude any such list from being called definitive.

The strong downward trend of the US dollar index (USDX) since its November 2006 peak has weakened that currency's position as a hard currency. Before its replacement by the euro, the Deutsche Mark (German Mark) was considered one of the best hard currencies.

Currency composition of official foreign exchange reserves
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
US dollar 59.0% 62.1% 65.2% 69.3% 70.9% 70.5% 70.7% 66.5% 65.8% 65.9% 66.4% 65.7% 64.1% 64.0%
Euro 17.9% 18.8% 19.8% 24.2% 25.3% 24.9% 24.3% 25.2% 26.3% 26.5%
German mark 15.8% 14.7% 14.5% 13.8%
Pound sterling 2.1% 2.7% 2.6% 2.7% 2.9% 2.8% 2.7% 2.9% 2.6% 3.3% 3.6% 4.2% 4.7% 4.1%
Japanese yen 6.8% 6.7% 5.8% 6.2% 6.4% 6.3% 5.2% 4.5% 4.1% 3.9% 3.7% 3.2% 2.9% 3.3%
French franc 2.4% 1.8% 1.4% 1.6%
Swiss franc 0.3% 0.2% 0.4% 0.3% 0.2% 0.3% 0.3% 0.4% 0.2% 0.2% 0.1% 0.2% 0.2% 0.1%
Other 13.6% 11.7% 10.2% 6.1% 1.6% 1.4% 1.2% 1.4% 1.9% 1.8% 1.9% 1.5% 1.8% 2.0%
Sources: 1995-1999, 2006-2008 IMF: Currency Composition of Official Foreign Exchange ReservesPDF (80 KB)
Sources: 1999-2005, ECB: The Accumulation of Foreign ReservesPDF (816 KB)                  

In some economies, especially planned economies or those using a soft currency, there are special stores that accept only hard currency. Examples include Tuzex stores in the former Czechoslovakia, Intershops in East Germany or Friendship stores in the People's Republic of China in the early 1990s. These stores offer a wider variety of goods — many of which are scarce or imported — than standard stores.

Times change, and a currency that is considered weak at one time may become stronger, and perceived as a hard currency later on. For example, the pound sterling was considered structurally weak and liable to depreciate (in real terms) for much of the post World War II period; later it was considered to have re-established fiscal and monetary soundness and to be strong. The U.S. dollar (USD) has been considered a strong currency in recent years, and importantly a safe-haven in times of international tension or war, but the USA has large fiscal and trade deficits and an unresolved problem that many Asian currencies are pegged to the dollar and therefore do not appreciate as their trade surpluses with the USA grow; some commentators believe that these considerations imply that the U.S. dollar may soon enter a period of weakness, especially that there are signs that China may be relaxing the rate at which the yuan is pegged to the dollar. There is some fear that commodities quoted in USD, such as oil, may be under undue pressure to increase in price rapidly if the value of the USD becomes unstable and is no longer seen as a safe store of value. However, commodity prices should stabilize if their pricing is switched to a more stable currency or the USD stabilizes.

Investors as well as ordinary people generally prefer hard currencies to soft currencies at times of increased inflation (or more precisely increased inflation differentials between countries), at times of heightened political or military risk, or when they feel that one or more government-imposed exchange rates are unrealistic. There may be regulatory reasons for preferring to invest outside one's home currency, e.g. the local currency may be subject to capital controls which makes it difficult to spend it outside the host nation.

For example, during the Cold War, the ruble in the Soviet Union was not a hard currency because it could not be easily spent outside the Soviet Union and because the exchange rates were fixed at artificially high levels for persons with hard currency, such as Western tourists. (The Soviet government also imposed severe limits on how many rubles could be exchanged by Soviet citizens for hard currencies.) After the fall of the Soviet Union in December 1991, the ruble depreciated rapidly, while the purchasing power of the U.S. dollar was more stable, making it a harder currency than the ruble. A tourist could get 200 rubles per U.S. dollar in June 1992, and 500 rubles per USD in November. A worker getting paid 2000 rubles a month who planned to buy foreign merchandise would be better off exchanging rubles for dollars at the earlier rate than the later rate. 1000 rubles would buy US$5 in June, and that US$5 would be worth 2500 rubles in November.

Because hard currency may be subject to legal restrictions, transactions in hard currency may lead to a black market. In some cases, an economy may attempt to increase confidence in the local currency by pegging it against a hard currency, as is this case with the Hong Kong Dollar, the Bosnian konvertibilna marka or the Chinese Renminbi. This may lead to problems if economic conditions force the government to break the currency peg (and either appreciate or depreciate sharply) as occurred in Argentina in 2001.

In some cases, an economy may choose to abandon local currency altogether and adopt a hard currency as legal tender. Examples include the adoption in Ecuador and El Salvador of the U.S. dollar, and the adoption in Kosovo and Montenegro of first the German mark and later the euro.

See also

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File:Claudius II coin (colourised).png
Numismatics
Terminology
Portal
Currency

Circulating currencies
Community currencies

Fictional currencies

Ancient currencies
Medieval currencies
Byzantine

Modern currencies

Production
Exonumia

Notaphily

Scripophily

Hard currency or strong currency, in economics, refers to a globally traded currency that can serve as a reliable and stable store of value. Factors contributing to a currency's hard status can include political stability, low inflation, consistent monetary and fiscal policies, backing by reserves of precious metals, and long-term stable or upward-trending valuation against other currencies on a trade-weighted basis.

Conversely, a soft currency indicates a currency which is expected to depreciate against other currencies.[1] Such softness is typically the result of expectations from previous depreciations or devaluations, or of higher relative prices often caused by inflation.

Contents

Examples of hard currencies

Precious metals have been the most resilient currencies, with gold historically outlasting all forms of paper fiat money. The paper currencies of some developed countries have earned recognition as hard currencies at various times, including the United States dollar, Euro, Swiss franc, British pound sterling, Canadian dollar, Japanese yen, and Australian dollar. The Deutsche mark was once a hard currency, it is no longer in circulation, being replaced by the Euro.

Varying theories of monetary policy preclude any claim of a currency's hardness from being called definitive. The strong downward trend of the US dollar index (USDX) since its November 2006 peak has weakened that currency's position as a hard currency. Quantitative easing by central banks during the financial crisis of 2007–2010 has generally eroded the security of most fiat money.

In some economies, especially planned economies or those using a soft currency, there are special stores that accept only hard currency. Examples have included Tuzex stores in the former Czechoslovakia, Intershops in East Germany or Friendship stores in the People's Republic of China in the early 1990s. These stores offer a wider variety of goods — many of which are scarce or imported — than standard stores.

Variation in hardness of currencies

Times change, and a currency that is considered weak at one time may become stronger, and perceived as a hard currency later on. For example, the pound sterling was considered structurally weak and liable to depreciate (in real terms) for much of the post World War II period; later[when?] it was considered to have re-established fiscal and monetary soundness and to be strong. The U.S. dollar (USD) has been considered a strong currency in recent years,[when?] and importantly a safe-haven in times of international tension or war, but the USA has large fiscal and trade deficits and an unresolved problem that many Asian currencies are pegged to the dollar and therefore do not appreciate as their trade surpluses with the USA grow; some commentators believe that these considerations imply that the U.S. dollar may soon[when?] enter a period of weakness, especially that there are signs that China may be relaxing the rate at which the yuan is pegged to the dollar. There is some fear that commodities quoted in USD, such as oil, may be under undue pressure to increase in price rapidly if the value of the USD becomes unstable and is no longer seen as a safe store of value. However, commodity prices should stabilize if their pricing is switched to a more stable currency or the USD stabilizes.

Investors as well as ordinary people generally prefer hard currencies to soft currencies at times of increased inflation (or more precisely increased inflation differentials between countries), at times of heightened political or military risk, or when they feel that one or more government-imposed exchange rates are unrealistic. There may be regulatory reasons for preferring to invest outside one's home currency, e.g. the local currency may be subject to capital controls which makes it difficult to spend it outside the host nation.

For example, during the Cold War, the ruble in the Soviet Union was not a hard currency because it could not be easily spent outside the Soviet Union and because the exchange rates were fixed at artificially high levels for persons with hard currency, such as Western tourists. (The Soviet government also imposed severe limits on how many rubles could be exchanged by Soviet citizens for hard currencies.) After the fall of the Soviet Union in December 1991, the ruble depreciated rapidly, while the purchasing power of the U.S. dollar was more stable, making it a harder currency than the ruble. A tourist could get 200 rubles per U.S. dollar in June 1992, and 500 rubles per USD in November. A worker getting paid 2000 rubles a month who planned to buy foreign merchandise would be better off exchanging rubles for dollars at the earlier rate than the later rate. 1000 rubles would buy US$5 in June, and that US$5 would be worth 2500 rubles in November.

Mixed currencies

Because hard currency may be subject to legal restrictions, transactions in hard currency may lead to a black market. In some cases, a central bank may attempt to increase confidence in the local currency by pegging it against a hard currency, as is this case with the Hong Kong Dollar or the Bosnian konvertibilna marka. This may lead to problems if economic conditions force the government to break the currency peg (and either appreciate or depreciate sharply) as occurred in Argentina in 2001.

In some cases, an economy may choose to abandon local currency altogether and adopt a hard currency as legal tender. Examples include the adoption in Ecuador and El Salvador of the U.S. dollar, and the adoption in Kosovo and Montenegro of first the German mark and later the euro.

See also

References


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