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 Pound Sterling, the Japanese Yen, and the Swiss Franc. Before its replacement with the Euro the Deutschmark was considered perhaps the hard currency par excellence.

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 2 period; now it is considered to have re-established fiscal and monetary soundness and to be strong. The US dollar 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 (most importantly China) 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.

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 is (are) unrealistic. There may be regulatory reasons for preferring to invest outside ones 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. After the fall of the Soviet Union in late 1991, the former Soviet Union's ruble was rapidly inflating, while the purchasing power of the United States dollar was more stable, making it a harder currency than the ruble. A tourist could get 200 rubles for a dollar ($1 USD) in June 2002, 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 $5 USD in June, and that $5 USD 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 or the 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 of Ecuador and Panama of the United States Dollar, and the adoption in Kosovo of first the Deutschmark and later the Euro.