Forex traders (foreign exchange) always try to choose. currency pair the best. to choose currency pair This (currency pair) is the best, there are many things to consider. One of them is the level of demand for currency in national trade.
The higher the demand for a country’s currency, the higher it is. The more liquid trading in the Forex market, the lower the demand for international trading. The level of liquidity will be lower. These types of currencies on demand are known as hard and soft currencies.
Definition of hard currency
Hard currency is a currency that is in high demand in international trade. This can happen because these types of currencies are recognized as a medium of exchange. In general, hard currencies are money issued by developed countries that are economically secure. society and politics
The logic is when the country’s economic and political conditions are stable. Foreign investment will come in a lot. These foreign investors are required to invest in local currency. As a result, the demand for the local currency has increased and the value of the currency has strengthened. (increase compared to other countries’ currencies)
Generally, forex traders trade these types of currencies. The reason is because hard currencies are quite liquid. Also known to be easy to sell and find due to stable demand. As a result, the price dynamics of the hard currency remained relatively stable. (It’s not easy to decrease or increase quickly)
You could say that currency appreciation is similar to blue chip stocks in stock trading. The price change was not too severe. But many of them are looking for and issued by reputable institutions.
Definition of Weak Currency
A soft currency is a currency with low international demand. Usually, it is issued by developing or poor countries that do not have stable economic and social conditions. A simple example is the rupiah that fell sharply in 1998.
The hard currency logic above applies here too. When the country’s economic, social and political conditions are in chaos There will be no foreign investors to invest in that country. As a result, demand and prices fell.
This happened to Indonesia in 1998. The unstable socio-political conditions coupled with the economic factors of Thailand. causing many foreign investors to leave Indonesia. As a result, the exchange rate of the Rupiah to the Dollar dropped from $1, equivalent to Rs. 2500, to $1, equivalent to Rs.16,000, in just a few months. This example indicates the weakness of a weak currency, i.e. its value is relatively unstable. So it’s easy to get up and down quickly.
But the advantage is that it is possible for traders to benefit greatly from the increase in the price of this weak currency due to its rapid increase. Interest rates higher than the central banks of countries that issue hard currencies.
The goal is that foreign investors or traders want to buy a soft currency so that its exchange rate against other currencies will increase. So don’t be surprised if Indonesian banks raise the benchmark interest rate in this country. When the US Federal Reserve (US Federal Reserve dollar issuer) raised Uncle Sam’s domestic benchmark interest rate to control inflation.
Examples of hard and soft currencies
hard currency example
- United States Dollar (USD)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- Swiss Frank (CHF)
- Pound sterling (GBP)
- Japanese Yen (JPY)
- Renminbi, China (RNB)
- Euro (EUR)
weak currency example
- Indonesian Rupiah (IDR)
- Malaysian Ringgit (MYR)
- Saudi Riyal (SAR)
- South Korean Won (KRW)
- Indian Rupee (Rs)
- Russian Ruble (RUB)
- Singapore Dollar (SGD)
- Thai baht (THB).
Is it better to invest in hard or weak currencies?
In other words, it is advisable to trade hard currencies rather than weak ones. The reasons are as follows:
- Most legal brokers in Indonesia only offer trading on hard currencies.. In general The broker only offers major currency pairs. The reason is that the profit of these brokers (spread) depends on the level of liquidity in the market.
- liquidity. As mentioned above Developed country currency, such as the dollar or the euro. It tends to be more liquid or easier to liquidate than the rupiah to be exchanged for ringgit. The reason is that both the dollar and the euro are widely used in international trade. You will definitely be paid in dollars. not rupiah
- economic risk factors. Because in society, politics and economy are more mature. Trading in hard currencies is more reliable than soft ones. However, when developed countries that issue these currencies face a crisis. Developing countries that issue weak currencies will also be affected. The reason is because developing countries also trade internationally using the currencies of these developed countries.
- news factorEconomic news from developed countries tends to be more accessible than economic news from developing countries. In fact, this news is one of the key factors driving confidence in Forex trading.
However, as mentioned above The advantage of trading in weak currencies is the potential for high price fluctuations and offers a higher interest rate than the central bank of a developed country. high risk, high return High profit potential is often coupled with high risk.
Does Bitcoin include hard or weak currencies?
Although bitcoin is the world’s largest cryptocurrency with market capitalization. And it is widely used in real-world trading. The authors say that bitcoin is not a hard or soft currency.
The reason is that bitcoin is a digital currency or digital currency. While the dozens of currencies mentioned above are fiat or fiat currencies. fiat money. Even if it is both a currency, a cryptocurrency and fiat money looks very different
for example, fiat money Published and controlled by central bankwhile the issuance and turnover of cryptocurrencies It is not controlled by any party. Compare digital currencies with fiat money equal to exchange with rupiah
Regardless of the hard or weak currency type, forex traders must carefully select the currency pair. Many things need to be considered, such as economic conditions, level of liquidity. and ease of transactions