Hard currency is mandatory to transact international business. Hard currency enables goods and services to be bought by inspiring confidence that the exchanged paper money and coins will hold worth over time. These currencies are identified with home nations that promote free markets, technological innovation and strong legal systems that protect individual rights.
Deardorff's Glossary of International Economics defines hard currency as "a currency that is widely accepted around the world, usually because it is the currency of a country with a large and stable market." Further, this definition implies that hard currency represents viable storage of value that will not fluctuate wildly with market conditions and politics.
Hard currency is always an accepted medium to transact business and deliver price quotes internationally. It is readily available at major banks for exchange, and the rates are the most often quoted by the financial media. Although exchange rates and values of competing currencies will fluctuate from day to day, hard currency buying power is relatively stable in the short term.
The Group of Seven (G-7) always serves as the ideal reference point for hard currency nations. The G-7 is composed of the finance ministers and top officials from the industrialized nations of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
Currencies identified with these countries are the Canadian dollar, euro, yen, British pound, and U.S. dollar, respectively.
The U.S. Dollar
The U.S. dollar is the model for hard currency. The Central Intelligence Agency identifies the United States as "the largest and most technologically powerful economy in the world." This status is based upon gross domestic product figures that have led the world into the modern era.
The U.S. dollar is the language of business. Oil is quoted and delivered in dollars; multinational corporate annual reports are broken down into U.S. dollars and numerous emerging markets peg their home currencies to the dollar for legitimacy.
Earning and Losing Hard Currency Status
Brazil, Russia, India, and China (BRIC) are rapidly emerging nations that have yet to earn hard currency acclaim. The BRICs must address issues concerning civil rights, graft, and corruption to achieve international respect. China has actually artificially pegged and devalued its yuan to the U.S. Dollar in order to boost its export economy.
All G-7 nations have grappled with the risk of losing hard currency status. For example, World War I and II debt and devastation decimated the valuations for the British Pound and Franc, Lira and Deutsche Mark (pre cursers to Euro), causing Western Europe to lose its designation as a hard currency haven for the time period.
Further, deficits and inflationary government policy threaten to derail the U.S. dollar as the world's premier hard currency. Already bloated twin U.S. budget and trade deficits are projected to increase toward $10 trillion in the aftermath of the 2007-2009 recession and economic crisis. Printing money and stoking inflation destabilizes the U.S. dollar, which is not the way to maintain hard currency appeal.
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