Soft Currency

A soft currency is one with a value that fluctuates, predominantly lower, as a result of the country's political or economic uncertainty. As a result of the of this currency's instability, foreign exchange dealers tend to avoid it. In financial markets, participants will often refer to it as a "weak currency."

Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currencies to a currency such as the U.S. dollar.

Inherently, soft currencies are more volatile because of the nature of what drives the movements as well the lack of liquidity. Also, soft currencies are unlikely to be held by central banks as foreign reserves, unlike U.S. dollar, euros and the Japanese yen. 

The Zimbabwe dollar and the Venezuelan bolivar are two examples of soft currencies. Both these countries have experienced both political stability as well as hyperinflation which has led to sharp devaluation in its currency and the printing of high denominating notes. The annual growth domestic product (GDP) rate in Zimbabwe has fallen every year since 2011, and the Venezuelan economy has been in recession since the first-quarter of 2014.