Hard currency

A hard currency is a globally traded currency that is considered especially reliable and stable as a store of value. An alternative term is a safe-haven currency since forex traders, investors and others tend to flock to hard currencies in times of uncertainty. Hard currencies are also the staple of currency reserves around the world.

A currency is considered a hard currency does not mean that it is not subjected to exchange-rate fluctuations and is not interesting for forex traders. On the contrary, many of the most heavily traded currencies on the global fx market are also considered hard or fairly hard currencies. The United States dollar is considered a hard currency and is also the most heavily traded currency by volume. It is a very common counter-currency in currency pairs on the fx market and is included in all of the seven most heavily traded currency pairs.

Hard currency speculation for retail traders

Since hard currencies also tend to be heavily traded currencies on the fx market, it is usually not very difficult to find an online forex broker that will offer hard currency trading with good terms and conditions. In the 21st century, hard currency day trading has become popular among retail traders, and many brokers online offer this type of trading without requiring a big deposit. Increased competition within the field has allowed retail traders to become more selective in their choice of broker, and many will no longer sign-up with any particular broker without first doing multiple test runs using a virtual trading simulator, also known as a demo account.

Factors that can help make a currency hard.

Typically, several different supporting factors need to work together to make a currency hard. Examples of such factors are:

• The issuer is a politically and economically stable country with reliable and respected legal and bureaucratic institutions.
• The issuer is currently fiscally stable and is expected to continue to be.
• The currency is tied to an economy with both long-term stability and significant purchasing power.
• The policy and actions of the issuing central bank contribute to the currency being considered a safe haven.

Examples of hard currencies – now and then.

Which currencies that have been considered the least risky have varied over time. The Greek drachma, coined in the 5th century B.C. was a hard currency once upon a time, and so was the Roman denari, the Byzantine solidus and the Arab dinar.

Emperor Charlemagne’s monetary system was introduced in the Frankish Carolingian Empire in 781 AD and would, over the centuries, spread to much of Western Europe. The French franc has its origins in this system and has been a notable hard currency.

Just like many earlier coins used internationally, the Venetian ducat and the Florentine florin had a value as commodities as they were made from gold, and they became the hard currency of choice for trade between Europe and the Silk Road in the 13th to 16th century.

The Spanish silver dollar is often hailed as the first true global reserve currency, as it was widely known and recognized in Europe, the Americas and wide parts of Asia from the 1500s and into the 1800s. The Spanish Empire could mint so many silver coins because they obtained so much silver from their colonies in the Americas.

Reserve currencies

One barometer of how safe currencies are considered is how they are favoured within countries’ foreign-exchange reserves. A reserve currency is a foreign currency held in significant quantities by a central bank or monetary authority as a part of their foreign exchange reserve.

During much of the 1800s, when the British Empire was flourishing, the sterling was the primary reserve currency in much of the world, and it kept its dominance well into the 1900s. It was not until the middle of the 20th century that it was dethroned by the United States dollar as the world´s main reserve currency. By 1965, over 70% of official foreign exchange reserves were comprised of USD, and by 1975 it had increased to nearly 85%.

The European Currency Unit (ECU) came into existence in 1979, and by 1980 over 17% of the reserves were ECU, and the number for USD had dropped to below 58%. Another notable reserve currency at this point in history was the Deutsche mark, the official currency of Western Germany.

Today

In the year 2021, the dominating reserve currency was still the United States dollar, accounting for over 58% of official foreign exchange reserves. The Euro, which replaced the abovementioned ECU in 1999, accounted for just above 20%, followed by the Japanese yen at 5.57% and the sterling at 4.78%.

The Swiss franc

The Swiss franc (CHF) is not a major reserve currency, but was considered a safe-haven currency for much of the 20th century and still carry this reputation even though its reliability has dropped a little bit in the 21st century. Previously, Swiss law required that at least 40% of the Swiss franc was backed by gold reserves. The Swiss franc therefore became a safe-haven currency and was heavily utilized as a hedge to balance more risky investments in a portfolio, and it was also purchased by investors seeking global risk aversion. The gold-backing was abolished on May 1, 2000 after a referendum. By 2005, the Swiss National Bank still held 1,290 tonnes of gold in reserves.

During the summer of 2011, the European Sovereign Debt Crisis made traders and investors eager to get rid of EUR and buy CHF, causing the franc to appreciate quickly. In September, the Swiss National Bank announced that it intended to buy un unlimited amount of euro to maintain the exchange rate 1.00 EUR = 1.20 CHF. On January 15, 2015, the Swiss National Bank abolished their attempts at keeping a ceiling for the Swiss franc in relation to the Euro. This change came after several weeks of the Euro dropping in price.