Hard currency

Source: Wikipedia, the free encyclopedia.

In

political and fiscal condition and outlook, and the policy posture of the issuing central bank
.

Safe haven currency is defined as a currency which behaves like a hedge for a reference portfolio of risky assets conditional on movements in global risk aversion.[1] Conversely, a weak or soft currency is one which is expected to fluctuate erratically or depreciate against other currencies. Softness is typically the result of weak legal institutions and/or political or fiscal instability.

History

The paper currencies of some

British pound sterling, Japanese yen, Swiss franc and to a lesser extent the Canadian dollar and Australian dollar
. As times change, a currency that is considered weak at one time may become stronger, or vice versa.

One barometer of hard currencies is how they are favored within the

foreign-exchange reserves
of countries:

The percental composition of currencies of official foreign exchange reserves from 1995 to 2022.[2][3][4]

  Euro
  Other

Turmoil

The

dollarization. Countries have thus been compelled to purchase dollars for their foreign exchange reserves
, denominate their commodities in dollars for foreign trade, or even use dollars domestically, thus buoying the currency's value.

The

European sovereign debt crisis
has partially eroded that confidence.

The Swiss franc (CHF) has long been considered a hard currency, and in fact was the last paper currency in the world to terminate its convertibility to gold on May 1, 2000, following a referendum.[5][6] In the summer of 2011, the European sovereign debt crisis led to rapid flows out of the euro and into the franc by those seeking hard currency, causing the latter to appreciate rapidly. On September 6, 2011, the Swiss National Bank announced that it would buy an "unlimited" number of euros to fix an exchange rate at 1.00 EUR = 1.20 CHF, to protect its trade. This action temporarily eliminated the franc's hard currency advantage over the euro but was abandoned in January 2015.

Demand

Investors as well as ordinary people generally prefer hard currencies to soft currencies at times of increased inflation (or, more precisely, times of 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 US dollar was more stable, making it a harder currency than the ruble. A tourist could get 200 rubles per US dollar in June 1992, and 500 ruble per dollar in November 1992.

In some economies, which may be either

Czechoslovakia, Intershops in East Germany, Pewex in Poland, or Friendship stores in China in the early 1990s. These stores offer a wider variety of goods – many of which are scarce or imported – than standard stores.[citation needed
]

Mixed currencies

Because hard currencies may be subject to legal restrictions, the desire for transactions in hard currency may lead to a

economic conditions force the government to break the currency peg (and either appreciate or depreciate sharply) as occurred in the 1998–2002 Argentine great depression
.

In some cases, an economy may choose to abandon local currency altogether and adopt another country's currency as

German mark and later the euro in Serbia and Montenegro
.

See also

References

  1. S2CID 55678634
    .
  2. ^ For 1995–99, 2006–22: "Currency Composition of Official Foreign Exchange Reserves (COFER)". Washington, DC: International Monetary Fund. April 3, 2023.
  3. ISSN 1725-6534
    (online).
  4. (online).
  5. ^ "Swiss Narrowly Vote to Drop Gold Standard". The New York Times. Associated Press. 19 April 1999. Retrieved 6 May 2012.
  6. ^ "Federal Law on Currency and Legal Tender to enter into force on 1 May 2000" (Press release). Efd.admin.ch. 12 April 2000. Archived from the original on 17 May 2013. Retrieved 20 September 2012.