A hard currency is a type of currency that is widely accepted around the globe as a form of payment for goods and services. It is usually from a highly industrialized country that is politically and economically stable. The value of hard currencies is robust and they are not expected to drastically fluctuate in the short term.
Hard currencies are also often used as reserve currencies by central banks and are generally more exchangeable on the foreign exchange (Forex) market.
Examples of hard currency include the United States Dollar (USD), Euro (EUR), British Pound Sterling (GBP), Japanese Yen (JPY), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD).
Hard currencies are considered “hard” because they are often stored in hard assets, such as gold or other precious metals. The terms “hard” and “soft” originated when metal coins (hard) were a common form of currency, and paper money (soft) was introduced.
It’s important to note that hard currency is the opposite of soft currency, which is currency from a country with high inflation or political instability, making it less desirable for international transactions.
Example of a Hard Currency
Let’s say a global electronics company based in Japan sells its products in many countries worldwide. When this company does business in countries with less stable economies or currencies, it might prefer to conduct its transactions in a hard currency instead of the local currency.
For instance, if it sells products in a country where the local currency is subject to high inflation or economic instability, it might require payment in U.S. dollars (USD) instead of the local currency. The U.S. dollar is considered a hard currency because it is stable, widely accepted, and retains its value well.
By trading in USD, the company can avoid potential losses that could occur if the value of the local currency falls between the time of the sale and when the payment is received. This practice is common in international trade, especially in countries or regions with less stable economic conditions.
This is an example of the use of hard currency in international business. The use of a hard currency such as the USD, EUR, or JPY can provide a measure of financial stability and predictability in global commerce.