Soft currency: What is soft currency?
A soft currency or a soft currency is one whose price volatility is relatively low compared to other currencies because that currency is in low demand in foreign markets. The reason for the decline in demand can be caused by many factors but most of them are the result of political or economic uncertainty in the country.
What is soft currency?
A soft currency is one that struggles to maintain its value compared to other currencies. This is because traders and investors prefer to keep currencies other than soft currencies. This weak demand creates political and economic instability in the country which makes the currency price more volatile. In such cases, foreign exchange traders try to avoid foreign exchange currencies and traders, even at low volumes, can make large changes in the exchange rate of the currency. In financial markets, analysts and traders will refer to soft currencies as ‘weak currencies’. The currencies of most developing countries are considered soft currencies. Most of the time, the governments of these developing countries will treat their currencies like the US dollar and set remarkably high exchange rates.
This policy creates exchange value that is not favorable to investors or traders and weakens the demand for currency. Not surprisingly, soft currencies are more volatile as tendencies and less movement trigger their movement. Unlike the US dollar, euro and Japanese yen, the central bank is unlikely to have soft currency as foreign reserves. This fact further complicates the problems of instability.
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