What is Hard Currency?

Hard currency, in the world of finance, represents money that originates from a nation known for its stability, both politically and economically. These currencies hold significant value and are widely accepted globally for transactions, often being favored over domestic currencies.

Understanding Hard Currency

In essence, hard currencies are expected to uphold stability over short periods and remain highly liquid in foreign exchange markets. Among the most commonly traded hard currencies are the U.S. dollar (USD), Euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), and Australian dollar (AUD). These currencies are trusted by international investors and businesses due to their relative immunity to sudden value fluctuations.

The U.S. dollar holds a unique position as the world’s primary reserve currency, facilitating numerous international transactions conducted in this currency. In times of currency depreciation, individuals often turn to stable currencies like the U.S. dollar to safeguard their assets.

Example of Hard Currencies in Action

Notably, currencies like the Canadian and Australian dollars, though affected by commodity price fluctuations, demonstrate more resilience compared to currencies heavily reliant on commodities. For instance, the decline in energy prices in 2014 impacted the Australian and Canadian markets less severely than the Russian ruble. Currency devaluation often stems from factors such as increased money supply or diminished confidence in its stability due to economic, financial, or governmental uncertainties. A prime example of an unstable currency is the Argentinian peso, which plummeted by 34.6% in value against the dollar in 2015.

Currency values are predominantly influenced by economic indicators like GDP and employment rates. The supremacy of the U.S. dollar in the global arena reflects America’s leading GDP of $21.37 trillion as of 2019. In contrast, currencies like the Chinese yuan and Indian rupee, despite substantial GDP figures, do not qualify as hard currencies due to various factors influencing exchange rates, including central bank policies and political stability.

Downsides of a Hard Currency

While hard currencies hold greater value compared to others, this can pose challenges for importers in countries with weaker currencies. For instance, the exchange rates of 6.61 yuan per U.S. dollar and 73.97 rupee per dollar on November 6, 2020, disadvantage Chinese and Indian importers but benefit current account balances. A weaker exchange rate favors a country’s exporters by enhancing competitiveness in global markets. China has faced accusations of exchange rate manipulation to gain a competitive edge.