Hard currency
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Hard currency, in economics, refers to a currency in which investors have confidence, such as that of a politically stable country with low inflation and consistent monetary and fiscal policies, and one that if anything is tending to appreciate against other currencies on a trade-weighted basis. Examples of hard currencies at this time include the United States dollar, the euro, the Japanese yen, the pound sterling and the Swiss franc. At the end of 2001, 68.3% of the identified official foreign exchange reserves in the world were held in United States dollars, 13% in euros, 4.9% in Japanese yen, 4% in pounds sterling and 0.7% in Swiss francs [1]. Before its replacement by the euro, the German mark (Deutsche Mark) was considered one of the best hard currencies.
In some economies, especially planned economies or those using a soft currency, there are special stores which only accept hard currency. Examples include Intershops in East Germany or Friendship stores in the People's Republic of China in the early 1990s. These stores offer a wider variety of goods, many of which are scarce or imported, than standard stores.
Times change and a currency that is considered weak at one time may become stronger, and perceived as a hard currency, thereafter. For example, the pound sterling was considered structurally weak and liable to depreciate (in real terms) for much of the post World War II period; now it is considered to have re-established fiscal and monetary soundness and to be strong. The US dollar (USD) has been considered a strong currency in recent years, and importantly a safe-haven in times of international tension or war, but the USA has large fiscal and trade deficits and an unresolved problem that many Asian currencies are pegged to the dollar and therefore do not appreciate as their trade surpluses with the USA grow; some commentators believe that these considerations imply that the US dollar will now enter a period of weakness, especially that there are signs that China may be relaxing the rate at which the yuan is pegged to the dollar. There is some fear that commodities quoted in USD, such as oil, may be under undue pressure to increase in price rapidly if the value of the USD plummets and is no longer seen as a safe store of value. In time however, commodity prices should stabilize as their pricing is switched to more stable currencies.
Investors as well as ordinary people generally prefer hard currencies to soft currencies at times of increased inflation (or more precisely 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 rubles per USD in November. A worker getting paid 2000 rubles a month who planned to buy foreign merchandise would be better off exchanging rubles for dollars at the earlier rate than the later rate. 1000 rubles would buy US$5 in June, and that US$5 would be worth 2500 rubles in November.
Because hard currency may be subject to legal restrictions, transactions in hard currency may lead to a black market. In some cases, an economy may attempt to increase confidence in the local currency by pegging it against a hard currency, as is this case with the Hong Kong Dollar, the Bosnian konvertibilna marka or the Chinese Renminbi. This may lead to problems if economic conditions force the government to break the currency peg (and either appreciate or depreciate sharply) as occurred in Argentina in 2001.
In some cases, an economy may choose to abandon local currency altogether and adopt a hard currency as legal tender. Examples include the adoption in Ecuador and Panama of the US dollar, and the adoption in Kosovo and Montenegro of first the German mark and later the euro.
Hard currency can also be used to simply describe the physical banknotes and coins that are the currency.
