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Inmacroeconomics,hard currency,safe-haven currency, orstrong currency is anyglobally tradedcurrency that serves as a reliable and stablestore of value. Factors contributing to a currency'shard status might include the stability and reliability of the respective state's legal and bureaucratic institutions, level ofcorruption, long-term stability of itspurchasing power, the associated country'spolitical andfiscal condition and outlook, and the policy posture of the issuingcentral bank.
Safe haven currency is defined as a currency which behaves like ahedge for a reference portfolio of risky assets conditional on movements in globalrisk aversion.[1] Conversely, aweak orsoft currency is one which is expected to fluctuate erratically or depreciate against other currencies. Softness is typically the result of weak legal institutions and/or political or fiscal instability.Junk currency is even less trusted than soft currency, and has a very low currency value. Soft and junk currencies often suffer sharp falls in value.
The paper currencies of somedeveloped countries have earned recognition as hard currencies at various times, including theUnited States dollar,euro,British pound sterling,Japanese yen,Swiss franc and to a lesser extent theCanadian dollar,Australian dollar,New Zealand dollar,Swedish krona,Singapore dollar, andHong Kong dollar.[2][3][4] As times change, a currency that is considered weak at one time may become stronger, or vice versa;[5] the Japanese yen is a recent example.
One measure of hard currencies is how they are favored within theforeign-exchange reserves of countries:
The percental composition of currencies of official foreignexchange reserves from 1995 to 2022.[6][7][8]
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TheUS dollar (USD) has been considered a strong currency for much of its history. Despite theNixon shock of 1971, and the United States' growing fiscal and trade deficits, most of the world's monetary systems have been tied to the US dollar due to theBretton Woods system anddollarization. Countries have consequently been compelled to purchase dollars for theirforeign exchange reserves, price their commodities in dollars for foreign trade, or even use dollars domestically, thus buoying the currency's value.
Theeuro (EUR) has also been considered a hard currency for much of its short history. However, theEuropean sovereign debt crisis has partially eroded that confidence.
TheSwiss franc (CHF) has long been considered a hard currency, and in fact was the last paper currency in the world to terminate itsconvertibility to gold on 1 May 2000, followinga referendum.[9][10] In the summer of 2011, the European sovereign debt crisis led to rapid flows out of the euro and into the Swiss franc by those seeking hard currency, causing it to appreciate rapidly. On 6 September 2011, theSwiss National Bank announced that it would buy an "unlimited" number of euros to fix an exchange rate at 1.00 EUR = 1.20 CHF to protect its trade. This action temporarily eliminated the Swiss franc's hard currency advantage over the euro, but was abandoned in January 2015.
While theJapanese yen had been widely regarded as a hard currency, its sharp decline in value since 2022 has led to a loss of global confidence.[11][12].[13] Japanese economistIzuru Katō warns that the yen has effectively turned into a junk currency.[14] The impact of the recent decline of yen has also led to a series of moves by even Japanese companies to cease trading in Japanese yen.[15]
Investors as well as ordinary people generally prefer hard currencies to soft currencies at times of increased inflation (or, more precisely, times of increased inflation differentials between countries), at times of heightened political or military risk, or when they feel that one or more government-imposedexchange rates are unrealistic. There may be regulatory reasons for preferring to invest outside one's home currency, e.g. the local currency may be subject tocapital controls which makes it difficult to spend it outside the host nation.
For example, during theCold War, theruble in theSoviet 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 for persons with hard currency, such as Western tourists. (The Soviet government also imposed severe limits on how many rubles could be exchanged by Soviet citizens for hard currencies.) After the fall of the Soviet Union in December 1991, the ruble depreciated rapidly, while thepurchasing power of the US dollar was more stable, making it a harder currency than the ruble. A tourist could get 200 rubles per US dollar in June 1992, and 500 ruble per dollar in November 1992.
In some economies, which may be eitherplanned economies ormarket economies using asoft currency, there are special stores that accept only hard currency. Examples have includedBeryozka stores in the formerSoviet Union,Tuzex stores in formerCzechoslovakia,Intershops inEast Germany,Pewex andBaltona inPoland,Comturist inRomania,Corecom inBulgaria,Dollar stores inCuba, orFriendship stores inChina in the early 1990s. These stores offer a wider variety of goods – many of which are scarce or imported – than standard stores.[citation needed]
Because hard currencies may be subject to legal restrictions, the desire for transactions in hard currency may lead to ablack market. In some cases, a central bank may attempt to increase confidence in the local currency bypegging it against a hard currency, as is this case with theHong Kong dollar or theBosnia and Herzegovina convertible mark. This may lead to problems ifeconomic conditions force the government to break the currency peg (and either appreciate or depreciate sharply) as occurred in the1998–2002 Argentine great depression.
In some cases, an economy may choose to abandon local currency altogether and adopt another country's currency aslegal tender. Examples include the adoption of the US dollar inPanama,Ecuador,El Salvador andZimbabwe and the adoption of theGerman mark and later theeuro inSerbia andMontenegro.
