Hard Currency V/s Soft Currency

Recently I met my old school friend who is making great money in foreign exchange trade or Forex, as they call it. I was pretty impressed by how he was able to dodge his 9-5 job so early in his 20s. I decided to grill him a bit in order to learn some nuances of the forex trade. Starting from today I will be sharing few important points I learned and let me assure you it’s not as difficult as it seems.

Foreign exchange is usually related to buying and selling of currencies of different countries. In Foreign Exchange trade, currencies of different countries are broadly categorized as - Hard and Soft Currency.

What is Hard Currency?

Hard Currency, also referred to as strong currency, is usually the currency of a strong geo-political nation. The currency of such a nation is expected to remain stable over the period of time. These currencies are traded throughout the world and have a stable purchasing power. Most of the international deals and contracts are signed in terms of such currencies as their value doesn't fluctuate much over time. Historically, US dollar, Euro and Swiss franc are some of the currencies which are considered strong. Political stability, fiscal outlook, policy of central bank plays an important in determining how well a particular currency performs and pegs against other currencies.
High liquidity and free convertibility of the hard currency makes it an attractive option for investors as well as traders. Investors, generally, prefer to invest in such currencies especially during tough times. Such investments provide stable returns, which may not necessarily be high but are less risky.

What is Soft Currency?

Before I discuss about soft currency I would like to ask you a simple question, given a choice, would you like to invest your money in a bank in North Korea? I am sure you won't. Why? Because it faces a constant threat of War, its political establishment is not democratic, its economy is not open and is highly regularized by the whims of some high and mighty rulers of the Korean nation.
Although here I took an extreme example, but soft currencies are usually from countries that are not too stable (politically and economically) nor come in the category of "superpowers". Investments and trade in such currencies is a high risk proposition. But investors willing to earn more over short-term can definitely go for such currencies, at their own risk. For traders, soft currencies are a big NO-NO. Its convertibility outside the host nation is very less thus no major international deal take place using soft currencies.

Conclusion and Caution:
I would like to specify that there is no specific formula or rule which categorizes any particular currency as Hard or Soft. German Deutsche Mark was considered as a strong currency before Euro replaced it. Such incidents show that as an investor or trader you are advised to be sure about the Geo-Political as well as economic outlook of various countries. Be wary and cautious while making any international deal as they can be indirectly affected by major international events.

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