Hard and Soft Currencies in International Trade

Introduction

Global financing and exchange rates are among the basic considerations that a country faces, when engaging in business abroad. These are also fundamental concerns when dealing with foreign trade, exports and imports. Considering hard and soft currency is, therefore, essential for countries to avoid the risk associated with fluctuation of currencies (Brown, 1978). This paper will discuss hard and soft currencies and explain their importance in managing risk, when dealing with international trade.

Soft Currency

A soft currency can be defined as a weak currency that fluctuates easily when trading with other hard currencies, and thus it may be not fully accepted as a standard store of value globally. Most of unstable countries, which constantly experience political unrest or have unstable fiscal policies, use soft currency (Brown, 1978). Mostly, the third world states have soft currencies as contrasted to the developed countries which have hard currencies. In international discourse, soft currency can be avoided, and at times, some international countries disregard it as a legal tender. This is because the value of soft currencies is uncertain; thus holding such currencies, a risk of a loss in such a case appears if it drastically fluctuates against hard currency, such as dollar. Most developing countries conduct their transaction using soft currency. There are several challenges experienced when using it, since it faces high exchange rate. Some of the countries with soft currencies use both the soft and the hard ones. The locals use the soft currency to trade inside the economy, while the foreigners may find it appropriate to use the hard currency. However, when this is usually the case, the visitors face restriction from accessing other goods and services using hard currency. It is also crucial to note that when both the soft and hard currencies are in use, soft currency dominates the hard currency (Brown, 1978). This is because more people prefer to transact using soft currency, since it is possible to predict the fluctuation trend of such a currency and hold the hard one.

Hard Currencies

A hard currency can be defined as a strong currency which is globally accepted as a standard store of value. Hard currency is mostly that of the developed nations, which is, therefore, accepted in settling of payment internationally (Brown, 1978). One of the most fundamental characteristics that make the hard currency acceptable is that it is highly stable and does not face potential fluctuation threat, for instance, the U.S dollar or the Euro. Hard currency is mostly the currency of countries with stable economies, fiscal policies and political environment. A strong currency buys more units of soft currency considering the exchange rate. Therefore, this has a substantial effect on the foreign trade, when importing or exporting goods from one country to another. When hard currency is appreciated in value, it means that goods and services become expensive to foreigners as they require spending more of their national currencies when purchasing them. Therefore, this lowers export but, on the other hand, enhances imports because less number of the units of the hard currency purchase more units of soft currency from abroad, thereby, finding local goods and services with soft currency relatively cheap (Brown, 1978).

Conclusion

Hard currency is a strong currency accepted in international trade because its value is stable and does not fluctuate in a short period. On the other hand, a soft currency is a weak currency that faces a constant fluctuation and, therefore, cannot be used in international trade. Stability of a currency is influenced by country’s political and economic stabilities. A country with a stable political system and economy usually uses hard currency, while a country experiencing political unrest and economic instability has a soft currency.

Reference

Brown, B. (1978). Money hard and soft on the international currency markets. New York: Wiley.