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Sometimes referred to as hard currency, strong currency is any currency issued by a country that is traded on a global basis, and is considered to be stable and likely to retain or even increase in value over the foreseeable future. This higher level of stability leads to consistent performance on foreign exchange markets and increases the chances that companies located in other countries will accept the currency as payment. A shift in economic situations that affect the performance of the strong currency on the world market can be severe enough to cause the currency to lose its status, or actually cause the currency to become stronger and more desirable.
Strong currency normally exhibits several specific characteristics. One has to do with the type of backing that the currency enjoys. Typically, many countries back their currencies with reserves of various types of precious metals. The political stability of the issuing nation is also key to whether or not a given currency is viewed as being strong. In situations where economic conditions in a country are currently impacted by high inflation rates, this will have a detrimental effect on the performance of the currency. Strong currency requires that the economy exhibit a low rate of inflation, and that the country demonstrate financial and monetary policies that are considered sound.
While several factors tend to be involved when determining if a given currency is strong, there is no one definitive formula that is universally accepted. This creates a situation where perception plays a significant role in which currencies are considered strong and which are considered to be somewhat soft. It is very possible for some analysts and investors to identify a given currency as strong, while others do not think the currency, while stable, merits the designation of hard or strong.
Changes in the country of origin can cause a strong currency to become less desirable to investors. For example, a war will often have a profound impact on the stability of the currency of any nation that is invaded, or whose infrastructure is severely crippled by the war in some manner. Political upheavals are also likely to undermine a strong currency and cause it to lose value in comparison with other currencies. Economic downturns, such as a recession will also lead to poorer performance when compared to currency issued by a nation that is enjoying a period of economic prosperity. Since conditions can change quickly, a currency can be strong for a time, lose that status, then regain it once the underlying events have run their course.