Veronica L. Powell
University of Phoenix
March 31, 2009
Global Financing and Exchange Rate Mechanisms
Currency is unreliable. In some countries the United States dollar is worth more than that countries currency, while in other countries the U.S. dollar is worth less. The exchange rate fluctuates on a continuous base which makes the term “funny money” more realistic each day. The purpose of this paper is to discuss hard and soft currency, the South African rand, Cuban pesos, and why the exchange rates fluctuate.
Hard currency is a currency, usually from a highly industrialized country, that is largely accepted globally as a form of payment for goods and services (Investopedia, 2010). Hard currency is presumed to remain fairly stable through a short period of time, and to be considerably liquid in foreign exchange markets. Soft currency is 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 (Investopedia, 2010).
Hard currency comes from a country that is politically and economically stable. The United States dollar and the British pound are examples of hard currencies. Soft currencies tend to be prevalent in developing countries. Often, governments from developing countries set unreasonably high exchange rates, pegging the currency of that country to a currency such as the United States dollar.
South Africa had a fixed exchange rate for its currency until the latter part of the 1960s; afterward, the South African rand was pegged against major foreign currency. The value of the rand followed changes in the balance of payments and moved roughly with sterling and other weaker currencies until 1985 (Country Data, 1996). The foreign debt crisis of 1985 prompted the rand...