Hard and soft currencies
January 10, 2012
University Of Phoenix
Hard and soft currencies
Global financing and exchange rates are major topics when considering a venturing business abroad. In the proceeding I will explain in detail what hard and soft currencies are. I will explain the reasoning for the fluctuating currencies. Lastly, I will explain hard and soft currencies importance in managing risks.
Hard currency is usually from a highly industrialized country that is widely accepted around the world as a form of payment for goods and services. A hard currency is expected to remain relatively stable through a short period of time, and to be ...view middle of the document...
Soft currency is another name for weak currency. The values of soft currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency. Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set high exchange rates, pegging their currency to a currency such as the U.S. dollar (Investopedia, 2011).
Soft currency breaks down to the currency being weak, an example of this would be the Mexican peso. A weak dollar also hurts some people and benefits others. When the value of the dollar falls or weakens in relation to another currency, prices of goods and services from that country rise for U.S. consumers. It takes more dollars to purchase the same amount of foreign currency to buy goods and services. It means U.S. consumers and U.S. companies that import products have reduced purchasing power. At the same time, a weak dollar means prices for U.S. products fall in foreign markets, benefiting U.S. exporters and foreign consumers. With a weak dollar, it takes fewer units of foreign currency to buy the right amount of dollars to purchase U.S. goods. As a result, consumers in other countries can buy U.S. products with less money (Linden, 2011).
There are reasons that contribute to the fluctuation of currency for strong and weak currency. The factors that contribute to a strong currency are as follows: Higher interest rates in home country than abroad, lower rates of inflation, a domestic trade surplus relative to other countries, political or military unrest in other countries, and a strong domestic financial market (Linden, 2011).
The factors that contribute to a weak currency are as follows: Lower interest rates in home country than abroad, higher rates of inflation, a consistent government surplus, a domestic trade deficit relative to other countries, weak domestic economy, recent default on government debt, and a monetary policy that frequently changes objectives (Linden, 2011).
When doing business abroad there are many risk factors that must be addressed, and keeping these factors in check is crucial to a company’s success. Economic risk can be broadly summarized as a series of macroeconomic events that might impair the enjoyment of expected...