- Currency depreciation is the loss of value of a country’s currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system.
- It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears interchangeably with devaluation. Its opposite, an increase of value of a currency, is currency appreciation.
- The depreciation of a country’s currency refers to a decrease in the value of that country’s currency.
- For instance, if the Indian rupee depreciates relative to the dollar, the exchange rate (the Indian rupee price of euros) rises: it takes more Indian rupee to purchase 1 dollar.
- When the Indian rupee depreciates relative to the dollar, the Indian rupee becomes more competitive because the price of Indian goods when exchanged to dollar will be cheaper leading to a larger Indian export. On the other hand, US that denominates its goods and services in dollar will have lost competitiveness to the Indian rupee. The price of American products denominated in dollars will thus become more expensive in India.
- The appreciation of a country’s currency refers to an increase in the value of that country’s currency. If the Indian rupee appreciates relative to the dollar, the exchange rate falls: it takes fewer Indian rupees to purchase 1 dollar. When the Indian rupee appreciates relative to the dollar, the Indian rupee becomes less competitive. This will lead to larger imports of American goods and services, and lower exports of Indian goods and services.
- A currency appreciates as a result of increased demand for that currency on world markets: its value in the world market increases. This increase in demand can occur for several reasons:
- When a country’s exports are high, the buyers of these exports need its currency to pay for those exports.
- When the country’s central bank increases interest rates, people will want that currency to deposit in the banks to earn that higher interest rate.
- When employment and per capital income in a country increase, the demand for its goods and services increases, along with demand for that country’s currency in the local market.
- When the demand of the currency is high in foreign exchange market
- Due to Government borrowing or loosening of fiscal policy.