What is a Hard Currency?
A hard currency refers to a currency that is generally issued by developed countries, globally traded, and seen as politically and economically stable. International investors put their confidence and trust in hard currencies because they will not dramatically depreciate or appreciate (fluctuate in relative value to other currencies). For the most part, the value of the currency is based on basic economic principles such as a country’s gross domestic product (GDP) and employment.
- Hard currency is a form of currency that is issued by the government, traded globally, and considered relatively stable.
- The key differences between soft and hard currency are stability, reliability, conversion, and whether or not it is widely accepted as a form of currency.
- Several factors affect a currency’s “hard status” – including the level of corruption and the long-term stability of its purchasing power.
Hard Currency vs. Soft Currency
In today’s world, tangible currency is either defined as soft currency or hard currency.
Hard currency is a stable and reliable form of currency that is issued by the government and widely accepted around the world.
Soft currency is an unstable form of currency that is unconvertable, fluctuates erratically, and/or depreciates against other currencies.
Factors that Affect Hard Status
A hard status associated with an economically and politically stable country is a determinant for whether or not a currency is considered hard. Bulleted below are the factors that may affect a currency’s hard status:
- Reliability of the respective country’s legal and bureaucratic institutions
- Stability of the respective country’s legal and bureaucratic institutions
- Respective country’s political and fiscal condition
- Long-term stability of its purchasing power
- Policy posture of the country’s issuing central bank
- Social and military stability
- Level of corruption
Examples of Hard and Soft Currencies
Examples of some of the most prominent hard currencies are listed below:
- The U.S. dollar (USD)
- The euro (EUR)
- The Canadian dollar (CAD)
- The British pound sterling (GBP)
- The Japanese yen (JPY)
- The Australian dollar (AUD)
- The Swiss franc (CHF)
As the list above shows, hard currencies are globally recognized, government-issued currencies that store value over a long period of time.
Examples of some of the most known soft currencies are listed below:
- The Venezuelan bolivar (VEF)
- The Zimbabwe dollar (ZWL)
- Syrian pound (SYP)
- Turkish lira (TRY)
- West African franc (CFA)
- Egyptian pound (EGP)
As shown above, the currencies that are considered “soft” are currencies from countries that are pegged with war, inflation, corruption, poverty, and political instability. As a result, soft currencies are unstable, undesirable, and fluctuate quite frequently.
Comparison of Hard Currencies vs. Soft Currencies
To put the concept of hard and soft currencies into perspective, this example will compare conversion rates between the U.S. dollar and the soft currencies listed above.
- USD vs. VEF: One U.S. dollar is worth approximately 10 Venezuelan bolivars.
- USD vs. ZWL: One U.S. dollar is worth approximately 362 Zimbabwe dollars.
- USD vs. SYP: One U.S. dollar is worth approximately 512 Syrian pounds.
- USD vs. TRY: One U.S. dollar is worth approximately 8 Turkish lira.
- USD vs. CFA: One U.S. dollar is worth approximately 557 West African francs.
- USD vs. EGP: One U.S. dollar is worth approximately 16 Egyptian pounds.
The point that should be emphasized is the fact that hard currency is worth much more than soft currency because it is more stable and does not dramatically fluctuate.
Hard Currency Black Market
In some countries, hard currencies are subject to legal restrictions. It caused hard-currency-seeking individuals to obtain their desired currency through the black market.
Countries set legal restrictions on hard currencies to promote the usage of local currencies. Occasionally, an economy may choose to abandon their local currency completely and adopt another fiat money (no intrinsic value) while they begin to implement and substitute a new form of local currency.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: