Hard currency refers to a type of currency which proves to be generally accepted throughout the globe for payments on services and goods. Such currencies are trusted to be reasonably stable over the short term timeframe. They must be extremely liquid on foreign exchange, or forex (FX), markets. Nations with solid economic performances and highly stable political environments typically issue these.
Because such hard currencies come from economically and politically stable nations, they are greatly respected in settlement of payments and forex trade and markets. Huge multinational transactions commonly become settled in one of the world’s main hard currencies. There are a few such currencies. While the U.S. dollar is often referred to as today’s ultimate hard currency, a number of other ones exist nowadays. The Euro zone euro, the British pound sterling, the Swiss franc, and the Japanese yen are among these examples.
The phrase is similar to that of reserve currency. The difference is that it is possible to be considered a hard currency while not truly being a reserve currency. The Swiss franc is a classic example of a currency which is most definitely a hard currency but not one of the principle reserve currencies of the world. Markets for the real hard currencies are highly liquid, even when compared to the typically liquid nature of forex trading in general.
A typical means for determining how strong a hard currency actually is revolves around the foreign exchange markets’ liquidity. There are eight global currencies which are considered to be by far and away the most heavily traded ones on earth. These are the U.S. dollar (USD), the euro (EUR), British pound sterling (GBP), the Japanese yen (JPY), the Swiss franc (CHF), the Canadian dollar (CAD), the Australian dollar (AUD), and the New Zealand dollar (NZD). Each of these proves to be hard currencies because of their massive liquidity amounts in FX markets. Sometimes the South African Rand (ZAR) is added to this list as a ninth hard currency.
Not all of them are reserve currencies however (as with CHF, CAD, AUD, NZD, and ZAR). The United States dollar is still considered to be the most important reserve currency of the world even today. This is because it settles international trade transactions for between 60 – 70 percent of all international transactions in the world.
Each of these hard currencies earned the confidence and respect of the international business and investment community. This is because they typically do not radically appreciate or depreciate. There are some exceptions to the rule. In 2015, the Swiss franc soared by as much as 40 percent against the euro within hours of the Swiss National Bank abandoning their two year long ceiling versus the euro. Still the Swiss Franc versus both the euro and the U.S. dollar did stabilize within months.
The opposite of a hard currency would be an unstable currency. While the hard currencies are stable in supply and always in demand, weaker unstable currencies come from nations whose finances are in chaos. Argentina and its peso are dramatic examples of unstable currencies. In 2015, the Argentina peso plunged 34.6 percent of its total value versus the dollar. This scared especially foreign investors away from the extremely unattractive currency.
It is interesting to note that currency values primarily derive from the important economic considerations, including a nation’s GDP Gross Domestic Product. Part of the reason the U.S. dollar remains so strong is because the country’s GDP for 2015 was $17.947 trillion and ranked number one on earth. China came in second that year with a $10.983 trillion economy. India ranked seventh with a $2.091 trillion economy.
Yet neither the Chinese Renminbi nor the Indian rupee enjoys the status of hard currency. It goes to show how the stability of a country’s money supply and the policies of its central bank play into which currencies are considered to be hard and which are deemed less stable and less respected internationally.