First I will start by defining the meaning of hard and soft currency. Hard currency is a freely convertible currency that is not expected to depreciate significantly in value in the foreseeable future. A hard currency is considered to be stable, meaning that it is not subject to dramatic variations in its value relative to other currencies expressed as changes in its exchange rate. As a general rule, demand for hard currency in foreign exchange markets is high because of it stability. A soft currency often is a currency that is not fully convertible to all currencies. For example, it may be convertible to other soft currencies but not readily convertible against hard currencies. As a result, soft currencies may not be accepted in international business transactions by the seller either because of concerns about dramatic fluctuations in exchange rates of soft currencies or because of unrealistic official rates of change.
According to John Leslie Livingstone in The Portable MBA in Finance and Accounting (1997), when a company exports goods one of the risks the company must address involves foreign exchange rate fluctuations. One way to avoid exchange rate risk is to require payment in advance. The problem is that requiring cash in advance tends to reduce sales. Another way to address foreign exchange rate risk is to require the buyer to remit payment to the seller in a hard currency such as the U.S. dollar.
Soft and hard currencies are two forms of monies that have been used around the world for decades. Soft currency derives from nations that are less fortunate (i.e. Africa) and cannot afford the luxury of hard currency (i.e. Europe). Once they use soft currency, poorer nations often try to harden it by using soft currency (cheap money) to motivate higher p ...