Hard currency: Hard currency is very stable; it doesn’t change with the changes in the value related with the other currencies which we express as exchange rates. This currency can be converted easily and its value cannot be depreciated. Due to its stability and convertibility, the demand for this currency becomes very high and investors have confidence in investing with this hard currency. It is a suitable currency for such a country where there is low inflation and the monetary and fiscal policies are sound. Such currencies will appreciate with other countries on a trade weighted basis. Some of the examples of hard currencies are: dollar of United States, yen of Japanese, pound of British, franc of France, and the euros of Europe. Before deutschmark currency was considered the best of the hard currencies which was replaced by the euros,
Soft currency: Soft currency is unstable, unconvertible with other currencies. It is such a currency where in, it can be converted to other soft currencies of other countries but not against the hard currencies. Due to currency fluctuations in the exchange rates or because of its unrealistic official rates of change, these soft currencies are not acceptable in the international business transactions.
Country: Currency is influenced by the country too. Country should have a stable government like America for example although it has every four years a potential to change its political leaders and views and has little chance of revolution or an invasion its currency dollar, has a very good demand from all parts of the world. It is heard that American dollar is the only currency with which we can trade with the Middle East for oil supplies. On the other hand people who keep travelling overseas for vacations some times will not be able to buy anything although they have some American dollars.
Inflation: Currency of a country is influenced by the inflation factor of a country. Lack of inflation is through which countries currency is considered. All currency goes through different levels of inflation. When there is an increase in inflation the investors and the ordinary people prefer hard currencies to soft currencies. When there is an increase in the circulation of a currency there will be a sudden fall in its value and the prices rise. Increase in the issue of paper money or gold mined might have given rise to fall in the value of currency. Increase in expenditure results in decrease of supply of goods which in turn fails to meet the demand. Hard currency will depreciate much lower when compared with the currency in other countries. From experience or from observations we can say that the American government has done a good job of controlling inflation using both monetary and fiscal policy.
Global financing operations: Developed countries use Hard Currency in global financing operations. It is easily traded and bartered throughout the world. The values of the hard currency does not fluctuate, using of this hard currency ensures that there is an even play field for all parties in the transaction. But, in the case of soft currency it fluctuates often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country. Many things which contribute to the fluctuation of currency are inflation, strong financial market, and political or military unrest.
Investors: Investors and the ordinary people feel that when there is a political risk or imposed exchange rates are unrealistic they prefer to invest in the currency of other countries than investing in their home land. This kind of decision of investing in another country may have a significant effect on the economy of their home land. Investors desire to hold the dollar denominated assets which helped to finance the American government large budget deficiency and supplied funds to private credit markets.
The advantages a country has by holding the hard currency than the soft currency appears to be much better. Soft currency is less desired for the payments than that of the hard currency, the reliability is more in case of hard currency. Frequent devaluation, difficulties in payments and political influences of a country are more prominently noticed in the usage of soft currency
Economic risk: Economic risk can be broadly summarized as a series of macroeconomic events that might impair the enjoyment of expected earnings of any investment. When a company takes a decision to venture abroad it has to take many risk factors into consideration for its success. Some economists further specify this economic risk into financial factors and these factors leading to inconvertibility of currencies. The decision which a businessman takes to invest in another country will have a very prominent influence on economy of that country. Economic factors such as government finances, inflation, and others will lead to higher and sudden taxation or desperate government imposed restrictions on foreign investors’ or creditors’ rights.
When we go through the laws of supply and demand, we see that when there is an increase in supply of funds provided by other countries the price tends to lower these funds. The increase in the funds which are extended by the foreign investors will help to fill the budget deficit incurred and in turn lower the interest rates. The price of funds is the interest rate which we have to take into consideration. When we talk about the American government it gives a very clear picture that when the foreign investors hold the dollar denominated assets it helped the government’s large budget deficit and supplied funds to private and credit markets, foreign indebtedness or current account deficits. Whether a currency is said to be strong or weak it contains both positive and negative impact on a nation’s economy. Currencies that are strong and weak will not only affect the individual economy, but also tend to give a twist to the international trade, economy and political decision all over the world