Try disabling the visual editor in your User Profile and see if that helps. If it does, disable any plugins – always one of the first troubleshooting tips to try with WordPress – that have anything to do with the editor functions and enable the Visual Editor again and see if the text is still hard wrapping.
And, it’s always a good idea to check Developer Tools in your browser, too, to look for any javascript errors that will impact the editor. Use Firebug with Firefox, or use the developer tools in Chrome or Safari or IE
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