Soft currency

Another name for "weak currency". The values of soft currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency.

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Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currency to a currency such as the U.S. dollar.

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Funds of a country that are not acceptable in exchange for the hard currencies of other countries. Soft currencies, such as Russia's ruble, are fixed at unrealistic exchange rates and are not backed by gold, so that countries with hard currencies, like U.S. Dollars or British pounds, are reluctant to convert assets into them. See also Hard Money (Hard Currency).

Currency said to be a less desirable form of payment than other currencies. Weak currency countries have frequent currency devaluations against currencies of major trading partners, balance of payment deficits, or political instability. These currencies generally trade at a discount in relation to currencies of economically developed countries. Foreign exchange dealers generally do not make markets in weak currencies, except for currency speculation. A dealer who expects a weak currency to decline in value may sell that currency short, making a profit from the difference in exchange rates.

Acceptability of one currency versus another is dependent, of course, on local market conditions. The Portuguese escudo, for example, may be a weaker currency than the U.S. Dollar, but its relative weakness may not be significant enough to discourage exporters from accepting it as payment. Contrast with Strong Currency.

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Soft currency indicates a type of currency whose value may depreciate rapidly or that is difficult to convert into other currencies. It is generally less desirable than hard currency to users. Soft currency can be in the form of paper, electronic or debt-based "IOUs" which have in the past been used in place of hard currency.

As "bad money" generally displaces "good money" (good money being used as a store of wealth and bad money being used as a means of exchange), it is generally the case that governments, private banks and other issuers of money have replaced hard currency with soft where the opportunity to do so has been permitted by the populace. This behavior is commonly known as Gresham's law.

See also

• Fiat currency
• Hard currency
• Monetary reform
• Private currency

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