Currency is the oldest form of medium for trade of goods and services. Currency has evolved in its forms and types and many categories have been developed. One such category and focus of this paper is the hard and soft currency. Hard currency can simply be defined as one in which investors has maximum confidence because the fiscal and monetary policies of its native country are stable and consistent. This is only possible when native country of that currency is economically strong to eliminate any uncertain and problematic situations.
Hard currencies are very useful in global trade because they are the reliable medium of exchange and represent a stable store of value. Examples of some hard currencies are US dollars, Euros, Yen and British Pound. As can be judged from the example that the native country of currencies such as US, Europe, Japan and Britain are very stable politically and economically. These hard currencies have consistently shown a very stable or upward valuation against other currencies over the long run. On the contrary, soft currencies are not acceptable as a medium of exchange in international trade because it is unstable in its value.
They usually show variations and depreciation in its value
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Hence declining GDP and exports and increasing dependence on imports keep that country to a disadvantage in world trade. Its trade deficit and fiscal deficit increases. The country also faces unemployment, inflation and declining standard of living due to which its currency is week against other currency. The soft currency is therefore not preferred in exchange of other one. Thus soft currency lacks liquidity in FOREX market. There are many implications for countries which either has hard or soft currencies. The country whose currency is hard has economic power over the world trade.
They find it easy to trade because their currencies are readily acceptable worldwide. Hence they are a strong party in negotiations and often win favorable trade terms and contracts. Apart from trade, these countries with hard currency also have many opportunities for expansion and increasing their output and productivity. These countries find it very easy to get financing in their own currency. For example, firms in US find it very easy to raise capital either from debt, equity or TFCs because they will pay interests and dividends in dollars.
The people of other countries find it very favorable to receive dividends and interest income in dollars because it is a hard currency and very reliable store of value. Hence the firms operating in hard currency countries find it very cheap to raise finance and often have to pay very low yield on capital raised. The countries having soft currencies are usually at a disadvantage because no one is ready to trade with them. And if anyone makes up the mind to trade, these countries usually get a bad deal and have to trade at a loss. These countries are weak party in negotiation in world trade.
They do not have strong voice in world forums and trade pacts. IMF, World Bank, and WTO are some of the multinational financial and trade associations which are mainly controlled and run by countries having hard currencies. The soft one has to follow the policies made by hard currency countries. Hence soft currency countries are trapped in vicious cycle. First, their soft currency does not allow them to earn favorable terms of trade; subsequently they are not able to develop economically and politically. Hence they are unfortunate to remain economically weak unless a big push allows them to overcome the barriers of development.
These countries find it very difficult to expand and grow its output and productivity. Its firms and businesses find it very difficult to raise capital in international market and if they get the capital, it usually contains very high interest rates. And if over the period the loan is outstanding, its soft currency further depreciates then it is very burdensome and difficult for them to service the debt. However, from the above discussion, it is evident that hard currency presents a good way to manage the risk. The hard currency usually appreciates in value relative to other currencies.
Hence the holder of hard currency usually finds appreciation in its investment value. Any type of investment in hard currency, such as paper currency, stocks, bonds etc, represents a safest type of investment with very low risk of decrease in value. Therefore I think hard currency is very favorable as a store of value that’s the reason why demand for hard currency is usually high. The investor’s confidence over hard currency never leads to decrease in its value because investor’s positive expectations always keep its demand on higher side.
Hence, hard currency issuers are in strong position in global financing operations and find it easy to manage the risks. References Akhile, J. (2006). Compensatory trade strategy: How to fund import export trade and industrial projects when hard currency is in short supply. iUniverse, Inc. Investopedia, (2010). Hard Currency. Retrieved May 7, 2010, from http://www. investopedia. com/terms/h/hardcurrency. asp WiseGeek, (2010). What is soft currency? Retrieved May 7, 2010, from http://www. wisegeek. com/what-is-soft-currency. htm