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Concept
Hard currency
Summary
In macroeconomics, hard currency, safe-haven currency, or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency's hard status might include the stability and reliability of the respective state's legal and bureaucratic institutions, level of corruption, long-term stability of its purchasing power, the associated country's political and fiscal condition and outlook, and the policy posture of the issuing central bank.
Safe haven currency is defined as a currency which behaves like a hedge for a reference portfolio of risky assets conditional on movements in global risk aversion. Conversely, a weak or soft 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.
The paper currencies of some developed countries have earned recognition as hard currencies at various times, including the United States dollar, euro, Japanese yen, British pound sterling, Swiss franc and to a lesser extent the Canadian dollar and Australian dollar. As times change, a currency that is considered weak at one time may become stronger, or vice versa.
One barometer of hard currencies is how they are favored within the foreign-exchange reserves of countries:
The US dollar (USD) has been considered a strong currency for much of its history. Despite the Nixon 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 the Bretton Woods system and dollarization. Countries have thus been compelled to purchase dollars for their foreign exchange reserves, denominate their commodities in dollars for foreign trade, or even use dollars domestically, thus buoying the currency's value.
The euro (EUR) has also been considered a hard currency for much of its short history. However, the European sovereign debt crisis has partially eroded that confidence.
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