Hard_vs_Soft_Currencies

Hard and soft currencies MGT/448 January 10, 2012 University Of Phoenix Martha Alcala 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 highly liquid in the forex market. Another criterion for a hard currency is that the currency must come from a politically and economically stable country. The U.S. dollar and the British pound are good examples of hard currencies (Investopedia, 2011). Hard currency means that the currency is strong. The terms strong and weak, rising and falling are terms used in foreign exchange which is referred to as forex. Rising and falling, strength and weakness are relative in change in position from a previous level. A strong dollar will buy more units of a foreign currency than previously. One result of a stronger dollar is that the prices of foreign goods and services drop for U.S. consumers. This will allow Americans to take the long vacation to another country, or buy a foreign car that used to be too expensive. U.S. consumers’ benefit from a strong dollar, but U.S. exporters is hurt. A strong dollar means that it takes more from a foreign currency to buy U.S. dollars. U.S. goods and services become more expensive for foreign consumers who, as a result, tend to buy fewer U.S. products. It takes more of a foreign currency to purchase a strong dollars products priced in dollars are more expensive when sold overseas (Chicago Fed, 2008). 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 earnings of any investment. The decisions of businesses to invest in another country can have a significant effect on their domestic economy. In the case of the U.S. the desire of foreign investors to hold dollar-denominated assets helped finance the U.S. government’s large budget deficit and supplied funds to private credit markets. According to the laws of supply and demand, an increased supply of funds, in this case funds provided by other countries, tends to lower the price of those funds. The price of funds is the interest rate. The increase in the supply of funds extended by foreign investors helped finance the budget deficit and helped keep interest rates below what they would have been without foreign capital. A strong currency can have both a positive and a negative impact on a nation’s economy. The same holds true for a weak currency. Currencies that are too strong or too weak not only affect individual economies, but tend to have a negative impact on international trade and economic and political decisions worldwide (Linden, 2011). In closing 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 highly liquid in the forex market. 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. Many things can contribute to the fluctuation of currency; a few of these things are inflation, strong financial market, and political or military unrest. The decisions of businesses to invest in another country can have a significant effect on their domestic economy. In the case of the U.S. the desire of foreign investors to hold dollar-denominated assets helped finance the U.S. government's large budget deficit and supplied funds to private credit markets. References Hard currency. (2011). In Hard currency. Retrieved from http://www.investopedia.com/terms/h/hardcurrency.asp#axzz1j66QYcQb Linden, . (2011). Global financing hard and soft currency. Retrieved from http://financeblogonline.info/finance/global-finance/global-financing-hard-and-soft-currency/