Soft Currency

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21 Aug, 2024

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Soft currency, also known as weak currency, is legal tender money sensitive or volatile to market conditions. Its value is less than other currencies as traders and investors prefer holding it less. So, the prime reason any currency turns soft is its declining demand and lower acceptance in the global market. It causes higher employment rates in the economy.

In addition, countries with weak currency witness higher export revenues. However, weak currencies are unmarketable i.e., illiquid in the foreign market. Therefore, it has lower demand in forex markets too. Also, it creates political and economic instability within the economy.

What Is Soft Currency?

Soft currency is a currency that weakens due to various socioeconomic factors. In addition, it is highly volatile or sensitive to market conditions. Therefore, it can fluctuate at a higher rate.
The soft currency factors are political instability, currency instability, weak governing bodies, and poor economic infrastructure.
It increases export sales but lowers the country's GDP as it invites hyperinflation within the economy. As a result, investors lose confidence in the currency.
Examples include Iranian Rial (IRR), Vietnamese Dong (VND), and other currencies in Asia.

Soft Currency Explained

Soft currency, in economics, refers to a currency that is internally weak to fight the market crisis. Simply put, such currencies have very less demand and lower acceptance globally. Additionally, they experience a drastic Gross Domestic Product (GDP) decline. As a result, weak-currency countries suffer from hyperinflation. For example, the soft currency list includes Zimbabwe and other African countries.

Although the concept of currency prevails back to 600 BCE, the weak currency started after liberalization and globalization. During the ancient era, kingdoms had their currencies to deal with. In response to the growth in barter exchanges, some currencies became hard while others were soft. For example, in the 17th and 18th centuries, Spanish silver coins had worldwide acceptance. However, the situation changed after the world war.

After the second world war, most countries faced inflation except the United States. By 1947, the U.S. had the majority of gold reserves, causing the dollar to be the hard (strong) currency. But, some European and Asian countries like Austria, Germany, Italy, China, India, and many others became a part of the weak currency. In the 21st century, the US dollar and Euro became widely accepted currencies worldwide. However, soft currencies like the Iranian Rial (IRR) and Vietnamese Dong (VND) faced lower demand in the forex market.

As the theory of this currency is slightly similar to a weak currency, it might sometimes be difficult to compete with other currencies in the global market. For instance, it can happen due to political or economic reasons like hyperinflation and war crises. As a result, people start changing their preferences from one currency to another. Even forex (foreign exchange) dealers and traders switch or avoid using this currency. Thus, its global demand falls, converting it into soft.

Factors Influencing Soft Currency

Many factors can make a currency weak. Let us look at some soft currency factors and their influence on the economy:

#1 - Political And Economic Instability

Political and economic instability is a major cause of the weakening of the currency. For example, countries with poor political power tend to cause a decline in the currency's value. As a result, the resulting decisions also turn bad. Besides that, economic crises like inflation, recession, and hyperinflation can also lead to a weaker currency.

#2 - Fiscal And Monetary Policy

A weak monetary policy can cause an increased money supply in the economy. Also, those in power and those who draft and execute fiscal policy are equally responsible for soft currencies. As a result, the currency devalues along the timeframe. Devaluation can cause investors to lose interest in the currency in the long term.

#3 - Strength Of The Currency

The two soft currency factors are just some of the ones influencing the economy. The other includes the strength or stability of the currency also plays a major role. For example, countries like the United States, the United Kingdom, and Japan have achieved stability through low inflation rates and boosting economic growth.

#4 - Economic, Political, and Legal Structure

Apart from economic instability, the economic infrastructure also plays a vital role in dealing with this currency. Countries with strong fiscal and monetary policies but weak governance can weaken their currency. For example, the country might fall on the soft currency list if corruption, crimes, and poor judiciary increase.

Examples

Let us look at some examples of soft currency to comprehend the concept better:

Example #1

Suppose the war between Ukraine and Russia intensifies. It results in political and economic instability within Ukraine. The cost of goods and services rises, resulting in hyperinflation. Also, there is huge damage to life and property. Ukraine has plenty to deal with in terms of war losses. At this point, the characteristics of soft currency become applicable. Consequently, investors become less interested in the currency. Because of its volatility, the demand for the Ukrainian Hryvnia drops in the forex market.

If a similar situation had appeared in the U.S. or U.K., there are equal chances of the currency turning soft. However, its intensity depends on its political and currency stability.

Example #2

According to the European Communication Research and Education Association (ECREA) report, there are almost 1035 soft currency countries. Out of which, 20 belong to Europe and Central Asia. The next 50 nations are a part of the African continent. Another 30 countries, including China and India, belong to the East and South Asia and Pacific. Recently, traders sold Californian wines at weak currency prices, affecting Chile's economy. As a result, influential countries like Australia, the U.S., and New Zealand could profit through export sales.

Soft Currency vs Hard Currency

Tangible currency refers to soft or hard currency in today's era. The following table depicts the comparison between both the currency.

	Hard Currency	Soft Currency
Form	Stable and reliable	Unstable, volatile, unconvertable
Issued By	Central government	Central government
Acceptance	Worldwide	In a country that issues it
Example	The Euro, the Japanese Yen (JPY)	The Zimbabwe DollarWest African Franc (CFA)

Frequently Asked Questions (FAQs)

Which countries have a soft currency?

Major countries having weak currencies reside in African countries, including Congo, Cameroon, Ethiopia, Kenya, Nigeria, South Africa, Sudan, Tanzania, and other parts of Sub-Saharan Africa. Following it are the 25 countries in Latin America & Caribbean. It also includes China, India, Nepal, and other Asian nations.

Is Bitcoin a soft currency?

No, Bitcoin is a hard currency because it is not affected by external market conditions. Unlike, the fiat currency (notes) does react to external factors.

Is the EuroEuro a hard or soft currency?

EuroEuro and dollar fall in the category of hard currency as they have wide acceptance. Hard currencies originate from countries that have strong economies and currency stability.

Does Soft currency devalue with time?

The two major reasons why weak currency devalues in the long term care –
- First, developing countries might impose import duties and ease export restrictions.
- Secondly, foreign governments and institutions show disinterest in the economy. For example, China's import duty is 16-17%, whereas the export duty is almost nil.