A convertible currency, in simple terms, is a currency that can be bought or sold without government restrictions, as opposed to those that are tightly controlled by a central bank or other regulating authority. Sometimes a convertible currency can also be known as a hard currency.
Generally, fully convertible currencies come from more stable and wealthy countries. Major currencies including pound sterling, US dollar, the euro, Japanese yen, and Swiss franc are convertible.
In addition to fully convertible currencies there are partially convertible and non-convertible currencies. As the name suggest, partially convertible currencies can be bought or sold but are subject to government restrictions. This includes the Chinese Renminbi or yuan, South African rand, and Malaysian ringgit. Restrictions will vary but can include where you take the money (some must stay in the country), you can only convert them in the country, limits on how much you can have, and how much you can take out of the country. You will usually have to prove that you are buying for a legitimate reason. Non-convertible, or ‘blocked’ currencies, are not traded on the foreign exchange market at all. One example is the Venezuelan bolivar.
Why are some currencies restricted?
Restrictions are usually in place in countries with less stable economies. An increase in the price of foreign imports or a capital flight on currency reserves could destabilise a fragile economy. If a country’s economy can support it, there are many advantages for having a convertible currency. It can create more business and employment opportunities, increase tourism, and provide other countries with access to their markets.
Why is convertible currency important in international trade?
Convertible currencies allow companies to trade across borders with confidence and transparent pricing. Being more liquid, it reduces volatility. The most popular convertible currency is US dollars: the most traded currency in the world. It is held in central banks as their main reserve and a number of asset classes are denominated in the currency. Being able to trade in a convertible currency means that you can trade with partners in less stable economies although it may be within the bounds of their government’s legislation.