Hard Currency - Turmoil in Hard Currencies

Turmoil in Hard Currencies

The US dollar (USD) has been considered a strong currency for much of its history. Despite the Nixon shock of 1971, and the United States' growing fiscal and trade deficits, most of the world's monetary systems have been tied to the US dollar due to the Bretton Woods System and dollarization. Countries have thus been compelled to purchase dollars for their foreign exchange reserves, denominate their commodities in dollars for foreign trade, or even use dollars domestically, thus buoying the currency's value. However the late-2000s financial crisis saw the institution of quantitative easing by the Federal Reserve, downgrades of US debt by credit rating agencies (during the debt-ceiling crisis), countries diversifying their foreign exchange reserves away from the dollar, the emergence of commodity markets trading in non-US currency (such as the Iranian oil bourse), resumed appreciation of the yuan by the People's Bank of China, and the IMF proposal of the SDR as an alternative to the dollar in some applications. These events and others have eroded confidence in the US dollar.

The euro (EUR) has also been considered a hard currency for much of its short history, however the European sovereign debt crisis has eroded that confidence, with many predicting the currency's demise.

The Swiss franc (CHF) has long been considered a hard currency, and in fact was the last paper currency in the world to terminate its convertibility to gold. In the summer of 2011, the European sovereign debt crisis lead to rapid flows out of the euro and into the franc by those seeking hard currency, causing the latter to appreciate rapidly. On September 6, 2011, the Swiss National Bank announced that it would buy an "unlimited" number of euros to fix an exchange rate at 1.00 EUR = 1.20 CHF, to protect its trade. The franc fell precipitously against the euro to match this rate, and the price of gold in CHF rose 5% in a matter of minutes. This action has, at least temporarily, eliminated the franc's hard currency advantage over the euro.

In the midst of the ongoing financial crisis, countries with strong currencies are at risk of capital inflows causing appreciation. The potential impact of such appreciation on a nation's economy is historically unprecedented due to globalization and free trade. Thus the world's central banks are locked into a spiral of "competitive devaluation" in which the value of all fiat money systems is being eroded. This process is reflected in the escalating price of gold — investors flock to gold and other precious metals as a store of value and hedge against inflation, which causes the price to increase rapidly, sometimes for several consecutive years and recently, at many times more than the rate of inflation.