Global financing and exchange rates are important topics when considering business abroad. As part of the procedure, I will explain in detail what strong and weak currencies are. Then I will talk in detail about the reasons for currency fluctuations. Finally, I will explain the importance of a hard and soft currency for risk management.
Hard currency usually comes from a highly developed industrialized country, widely used around the world as a way to pay for goods and services. A strong currency should remain relatively stable for a short time and be very liquid in the foreign exchange market. Another criterion for a strong currency is that the currency should come from a politically and economically stable country. The US dollar and the British pound are good examples of hard currencies (Investopedia, 2008). A strong currency basically means that the currency is strong. Strong and weak, growth and fall, strengthening and weakening – relative terms in the currency world (sometimes called “forex”). Rise and fall, strengthening and weakening all point to a relative change in the situation compared to the previous level. When the dollar “gets stronger,” its value increases against one or more other currencies. For a strong dollar you can buy more units of foreign currency than before. Because of the stronger dollar, the prices of foreign goods and services for American consumers are falling. This allows Americans to go on a long-delayed vacation in another country or buy an too expensive foreign car. U.S. consumers benefit from a strong dollar, but U.S. exporters have suffered. A strong dollar means that more currency is needed to buy U.S. dollars. American goods and services are becoming more expensive for foreign consumers, so they are buying fewer American goods. Because more currency is needed to buy strong dollars, dollar-valued goods become more expensive when sold abroad (chicagofed, 2008).
A soft currency is another name for a “weak currency.” The value of a soft currency often fluctuates, and other countries do not want to keep these currencies because of the political or economic uncertainty in the country’s soft currency. The currencies of most developing countries are considered soft currencies.
Change the currency
There are many factors that can contribute to currency fluctuations. Here are some for both strong and weak currency:
Factors contributing to a strong currency
Higher interest rates in your country than abroad
Domestic trade surplus compared to other countries
Large and persistent state deficit displaces domestic loans
Political or military unrest in other countries
Strong domestic financial market
Strong domestic economy/weaker foreign economy
There are no records of default on the national debt
Reasonable monetary policy aimed at price stability.
Factors contributing to a weak currency
Lower interest rates at home than abroad
Domestic trade deficit compared to other countries
Permanent state surplus
Relative political/military stability in other countries
The collapse of the domestic financial market
Weak domestic economy / strong foreign economy
Frequent or recent defaults on the national debt
Monetary policy, often changing goals
Importance for risk management
When you move abroad, you have to consider many risk factors, and the ability to manage these factors is essential to business success. In general terms, economic risk can be described as a series of macroeconomic events that may hinder the expected return on investment. Some analysts further break down economic risk into financial factors (factors that lead to currency irreversibility, such as external debt or current account deficits, etc.) and economic factors (such as public finances, inflation and other economic factors, into higher and more sudden. taxes or desperate government imposed restrictions on the rights of foreign investors or creditors). Altagrup, 2008. Companies’ decisions to invest in another country can have a significant impact on their national economy.
Hard currency usually comes from a highly developed industrialized country, widely used worldwide as a means of paying for goods and services. A strong currency should remain relatively stable for a short time and be very liquid in the foreign exchange market. A soft currency is another name for a weak currency.