Product Code Database
In macroeconomics, hard currency, safe-haven currency, or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency's hard status might include the stability and reliability of the respective state's legal and bureaucratic institutions, level of corruption, long-term stability of its purchasing power, the associated country's political and Fiscal policy 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. 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. Junk currency is even less trusted than soft currency, and has a very low currency value. Soft and junk currencies often suffer sharp falls in value.
Despite their countries' large economies, neither the Chinese renminbi (yuan) nor the Indian rupee are considered "hard" currencies. The rupee is not widely used in international trade and is not fully convertible on the capital account. In addition, India has a large trade deficit, which exerts downward pressure on the currency. The renminbi is not traded on world exchanges and the government places many controls on exchanging the currency.
One measure of hard currencies is how they are favored within the foreign-exchange reserves of countries:
The euro (EUR) has also been considered a hard currency for much of its short history. However, 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 gold standard on 1 May 2000, following a referendum. In the summer of 2011, the European sovereign debt crisis led to rapid flows out of the euro and into the Swiss franc by those seeking hard currency, causing it to appreciate rapidly. On 6 September 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 Swiss franc's hard currency advantage over the euro, but was abandoned in January 2015.
While the Japanese yen has been widely regarded as a hard currency, its sharp decline in value since 2022 has led to a loss of global confidence. Japanese economist Izuru Katō satirically warns that the yen may effectively turned into a "junk currency". The impact of the recent decline of yen has also led to a series of moves by even Japanese companies to cease trading in Japanese yen.
The Freiwirtschaft economist Silvio Gesell criticized hard currency and argued that it is responsible for enabling recessions. In his book, The Natural Economic Order, Gesell wrote "The power of money to affect exchanges, its technical quality from the mercantile standpoint, is in inverse proportion to its technical quality from the banking standpoint." Gesell believed that since gold and other commodity backed money are great for storing wealth, such money is therefore terrible for functioning as a medium of exchange, which he viewed to be the only legitimate function of money. In his view, "Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether." Gesell proposed that demurrage currency would solve the problems caused by hard currency.
American cigarettes were hard currency among civilians in Allied-occupied Germany after the end of World War II, because of the collapse in value of the Reichsmark.
For example, during the Cold War, the Soviet 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 planned economies or market economies using a soft currency, there are special stores that accept only hard currency. Examples have included Torgsin and Beryozka stores in the former Soviet Union, Tuzex stores in former Czechoslovakia, in former East Germany, Pewex and Baltona in Poland, Comturist in Romania, Corecom in Bulgaria, Dollar stores in Cuba, or in China in the early 1990s. These stores offer a wider variety of goods many of which are scarce or imported than standard stores.
In some cases, an economy may choose to abandon local currency altogether and adopt another country's currency as legal tender. Examples include the adoption of the US dollar in Panama, Ecuador, El Salvador and Zimbabwe and the adoption of the German mark and later the euro in Serbia and Montenegro.
|
|
