Hard Currency vs. Soft Currency

If you have been curious to know the difference between hard currency vs. soft currency, you are in the right place. First, a currency is money available in coins and notes. It is also the current medium of exchange in today’s world.

Hard currency is mainly issued by a developed nation and can be traded globally. This money is economically stable and attractive to international investors. Soft currency is prone to fluctuating because it is less attractive, hence there is less demand.

Now that you know the different definitions of hard and soft currencies, we can look at some factors affecting their status. The article will also explore the effects each of these currencies has on the government. 

All You Need To Know About Hard Currency

Hard currency is usually strong and the most traded currency globally because it is commonly used in the foreign exchange market. Besides, this currency feels safe for big businesses because it is not prone to depreciation or appreciation.

Today, the US Dollar is the leading currency globally, and it determines the value of most valuable commodities like oil and gold. Additionally, hard currencies come mainly from politically stable countries with stable economies.

The country’s economic and political stability factors are essential when determining currency strength because when they are unstable, there are likely to be fluctuations. The three main hard currencies are the US Dollar, the Euro, and the Canadian Dollar. 

Downsides of Hard Currency

Although hard currency is the most preferred in the world markets, it has some downsides. For example, exporters are disadvantaged. The goods the US produces are expensive in other countries, lowering demand.

Also, US investors in other countries make fewer profits because they receive lower value currency from foreign sales. If it gets serious, such companies often close due to high production costs. 

Soft Currency

The opposite of hard currency is soft currency. This type of currency is expected to fluctuate and has a lower value than the other currencies because of lower demand. The two main reasons for the fluctuation of soft currency are political instability and an unstable economy.

Also, since investors do not use the soft currency in the forex market, they do not hold it like they hold the rest. Investors are less interested in soft currency because of the political instability, leading to currency fluctuation. 

Also, these currencies are not held by banks as foreign reserves, which leads to volatility. 

Soft Currency vs. Hard Currency

Now that you have an idea of what soft and hard currencies are, let us look at the differences between these two.

Hard currency is globally accepted and used in the foreign exchange market. It is also more stable and reliable. On the other hand, soft currency is more prone to change due to fluctuations and is not used in foreign exchange markets.

Other Factors Influencing Currency’s Status

The factors that influence a currency’s status will also dictate if it will be a hard or soft currency. The primary factor is the political and economic stability of a country. These and others are explained below. 

1. Interest Rates

High-interest rates lead to high demand for the currency. When money is highly demanded, its value increases. Conversely, low-interest rates lead to low currency demand, reducing its value. Low rates could lead to a soft currency. 

2. Economic Growth

When a country’s economy is growing, more jobs are created. Further, investors are willing to locate  their businesses in those countries leading to more growth and employment.

A growing economy leads to increased inflation and higher interest rates. This later leads to more demand for the currency, increasing its value.

On the other hand, an economically stagnant country has fewer investors and more unemployed citizens. There are fewer investments in this country, hence a decreased currency value. 

3. Central Bank’s Policy

A country’s central bank policies dictate the value of the currency. The bank makes monetary policies that can positively or negatively affect the exchange rates. For example, increasing the interest rates on loans discourages investors from taking loans to start businesses.

4. Political Stability

A politically unstable country endures a lot of inflation. Investors are not attracted to set up businesses there because they feel unsafe. Also, the value of the currencies in said countries is low because the government gets little to no foreign investors.

Due to slow economic growth, these countries depend on bank loans payable with interest. Their devalued currency is also weak and in low demand. These countries’ currencies make up a large part of soft currency.

How to Increase a Country’s Currency

When comparing hard vs. soft currency, it is evident that hard currency is preferable. This realization could lead to more countries interested in increasing their currency value, and these are the tips. 

1. Lowering Interest Rates

Decreasing interest rates on loans allows investors to borrow more, leading to economic growth. Rapid economic growth leads to increased currency value. 

2. Reduce Inflation

Inflation happens when the prices of a commodity rise, decreasing the currency’s purchasing power. It can be because of an increase in raw materials and wages. This could lead to unemployment and an increase in living costs.

However, lower inflation will increase the value of the currency. It maintains the steadiness of the prices, and there is more investment in the country, leading to the creation of jobs. 

3. Political Stability

The country’s political climate is essential to its economy and currency growth. A politically unstable country has very little economic growth because investors do not tend to set up businesses there.

Final Words

The differences between hard currency vs. soft currencies dictate the country’s economic growth. Luckily, countries with soft currencies can follow the tips on how to grow their currencies.