Global finance and currency exchange rates are key topics when considering overseas ventures. I will explain in detail what hard currency and soft currency are. I will then explain in detail the reasons for currency fluctuations. Lastly I will explain the importance of hard and soft currencies in risk management.
hard currency
Hard currency usually originates from advanced industrial countries and is widely accepted throughout the world as a form of payment for goods and services. Hard currencies are expected to remain relatively stable over the short term, and are highly liquid on the forex market. Another criterion for hard currency is that it must originate from a politically and economically stable country. The US dollar and pound sterling are good examples of hard currencies (Investopedia, 2008). Hard currency basically means the currency is strong. The terms strong and weak, up and down, strength and weakness are relative terms in the world of foreign exchange (sometimes referred to as “Forex”). Ups and downs, strengthening and weakening indicate a change in the situation relative to the previous level. When the dollar “strengthens,” its value rises relative to one or more other currencies. A strong dollar will buy more foreign currency units than before. One consequence of a strengthening dollar is lower prices of foreign goods and services for American consumers. This allows Americans to take long-overdue vacations to other countries, or buy foreign cars that were previously too expensive. US consumers benefit from a stronger dollar, but US exporters suffer. A strong dollar means more foreign currency is needed to buy US dollars. American goods and services become more expensive for foreign consumers who, as a result, tend to buy fewer American products. Because it takes more foreign currency to buy a strong dollar, dollar-denominated products are more expensive when sold abroad (Chicagofed, 2008).
soft coins
Soft currency is another name for “soft currency”. The value of soft currencies often fluctuates, and other countries do not want to hold the currency because of political or economic uncertainty in the country with the soft currency. The currencies of most developing countries are soft currencies. Often, developing country governments set exchange rates that are too high and unrealistic, and peg their currencies to currencies such as the US dollar (Investment Words, 2008). Soft currencies collapse because the currency is too weak, an example of this is the Mexican peso. A weak dollar hurts some people and benefits others. When the dollar depreciates or weakens relative to other currencies, the prices of goods and services from that country rise for American consumers. It takes more dollars to buy the same amount of foreign currency to buy goods and services. This means that American consumers and American companies that import products experience a decline in purchasing power. At the same time, a weaker dollar means lower prices of US products in foreign markets, benefiting US exporters and foreign consumers. As the dollar weakens, it takes fewer units of foreign currency to purchase the right amount of dollars to buy American goods. As a result, consumers in other countries can buy American products for less money.
Currency volatility
Many things can contribute to currency volatility. Here are some strong and weak currencies:
Factors that contribute to currency strength
Domestic interest rates are higher than abroad
Low inflation rate
Local trade surplus compared to other countries
Large and consistent government deficits hinder domestic borrowing
Political or military unrest in another country
Strong local financial markets
Strong domestic economy/weak foreign economy
There is no record of default on government debt
Sound monetary policy aims to stabilize prices.
Factors contributing to currency weakness
Domestic interest rates are lower than abroad
High inflation rate
Domestic trade deficit compared to other countries
Improve government surplus
Relative political/military stability in other countries
The collapse of local financial markets
Weak domestic economy/stronger foreign economy
Recurrent or recent government debt defaults
Frequently changing monetary policy targets
important in risk management
When venturing overseas, there are many risk factors to overcome, and keeping these factors in check is critical to a company's success. Economic risk can be broadly summarized as a series of macroeconomic events that can reduce the expected returns from any investment. Some analysts divide economic risks into financial factors (factors that cause currency inconvertibility, such as foreign debt, current account deficit, etc.) or governments that desperately limit the rights of foreign investors or creditors). Altagroup, 2008. A company's decision to invest in another country can have a significant impact on its local economy. In the case of the United States, the willingness of foreign investors to hold dollar-denominated assets helped finance the US government's large budget deficit and provided funds for private credit markets. According to the law of supply and demand, an increase in the money supply – in this case money provided by other countries – tends to reduce the price of that money. The funds rate is the interest rate. The increased money supply provided by foreign investors helps finance budget deficits and helps keep interest rates lower than they would be without foreign capital. A strong currency can have both positive and negative impacts on a country's economy. The same applies to weak currencies. Currencies that are too strong or too weak not only impact individual economies, but tend to distort international trade and economic and political decisions around the world.
Conclusion
Hard currency usually originates from advanced industrial countries and is widely accepted throughout the world as a form of payment for goods and services. Hard currencies are expected to remain relatively stable over the short term, and are highly liquid on the forex market. Soft currency is another name for “soft currency”. The value of soft currencies often fluctuates, and other countries do not want to hold the currency because of political or economic uncertainty in the country with the soft currency. Many things can cause currency fluctuations; Some of these things are inflation, financial market forces, and political or military unrest. A company's decision to invest in another country can have a significant impact on its local economy. In the case of the United States, the willingness of foreign investors to hold dollar-denominated assets helped finance the US government's large budget deficit and provided funds for private credit markets.
