A Comprehensive Guide to Currency Appreciation & Depreciation

Secretary of the Treasury to analyze the exchange rate policies of other countries and determine if they are manipulating the exchange rate between their currency and the United States dollar. In 2019, Secretary Mnuchin found that China devalued its currency to gain an unfair competitive advantage in international trade. Investment into the country has fallen drastically and crude oil production, from which it earns roughly 90 per cent of its export income, is short of its 1.8mn barrels per day Opec quota. Central bank data shows it has $32.87bn in foreign exchange reserves, although almost $20bn of this was committed to paying off a series of derivatives deals.

  1. When a country is politically stable, investors have confidence that their investments will not be jeopardized by sudden changes in government policies, regulations, or political turmoil.
  2. Furthermore, in the economics book, these conclusions are generalized to the current account.
  3. Inflation rates calculated for each country can be compared to one another, of course, and countries experiencing more inflation than others will probably try to slow it down.
  4. The naira has plumbed new depths since the peg was removed as a lack of foreign exchange liquidity stalled planned reforms.
  5. During the 2010 to 2011 USD depreciation, the greenback hit all-time lows against the Japanese yen (JPY), the Canadian dollar (CAD) and the Australian dollar (AUD).

Currency appreciation makes foreign products cheaper for domestic buyers, thus encouraging import shipments and enabling the buyers to buy more international goods. However, it also means that local companies will face greater competitive pressure on domestic prices in their home markets from foreign companies selling. Increased import prices might drive up local inflation if the currency rate depreciates. Investors would want greater returns to compensate for inflation, and the central bank would be expected to boost interest rates to combat inflation, pushing interest rates further higher.

Quantitative Easing and The Falling USD

Their employer (or customers) must either give them more units of currency or more valuable units of currency. The value of a currency can depreciate in relation to the value of other currencies or to another benchmark. Currency depreciation can have both positive and negative impacts on an economy.

Sudden bouts of currency depreciation, especially in emerging markets, inevitably increase the fear of “contagion,” whereby many of these currencies get afflicted by similar investor concerns. Among the most notable was the Asian crisis of 1997 that was triggered by the collapse of the Thai baht that caused a sharp devaluation in most Southeast Asian currencies. However, the Central Bank of Iran has repeatedly said that it does not accept the exchange rate of the free market. The central bank considers the rate set by the Iran Center for Exchange to be official, which has increased by 4.1% since 6 October 2023 and reached 429,210 rials to the dollar.

Currency Depreciation

China and Japan, two countries that export a significant amount of goods to the United States, help finance U.S. deficit spending by loaning it massive amounts of money. Treasury securities (essentially IOUs) and pays interest to the nations that hold those securities. It’s possible that someday, those debts will come due and the lenders will want their money back. If lenders believe the debt level is unsustainable, theorists believe the dollar will weaken. However, since there’s a healthy demand for Treasuries, the U.S. typically issues new bonds to pay off any of the foreign-held bonds that are coming due. Trade balances are also impacted by export prices, inflation, and other variables.

In the United States, there are fears that China’s growing interest in attaining reserve currency status for the yuan will reduce demand for U.S. dollars. Similar concerns surround the idea that oil-producing nations will no longer demand payment in U.S. dollars. Any reduction in the artificial demand for U.S. dollars is likely to depreciate the dollar. Reserve currencies are used by nations across the world to purchase desired commodities, such as oil and gold. When sellers of these commodities demand payment in the reserve currency, an artificial demand for that currency is created, keeping it stronger than it might otherwise have been.

Terms of Trade

Secondly, President Trump approved the doubling of steel and aluminum tariffs imposed on Turkey at a time when there were already fears about the country’s struggling economy. The lira plunged by as much as 20% after Trump released the news via a tweet. On the other hand, if your firm imports raw materials to produce your finished products, currency depreciation is bad news. The question of whether currency depreciation is good or bad largely depends on perspective. If you are the chief executive officer of a company that exports its products, currency depreciation is good for you.

Exchange Rates – Factors Affecting Currency Values

Analyze factors like supply chain dynamics, regulatory environment, and economic resilience shaping this pivotal sector. Currency depreciation refers to the decline in the value of a country’s currency relative to other currencies or a set benchmark. It reflects a scenario where it takes progressively more units of a given currency to obtain one unit of another currency. A depreciating currency is often described as ‘weaker’ compared to others. This, as every good investor knows, is a bad idea because it produces debt. In the case of the United States, the country imports more than it exports, and has done so for decades.

As exports increase and imports decrease, there is typically a better balance of payments as the trade deficit shrinks. A country that devalues its currency can reduce its deficit because of the greater demand for its less expensive exports. Furthermore, in the economics book, these conclusions are generalized to the current account. The reason, the trade balance usually covers a substantial portion of the current account.

Since currency depreciation affects foreign exchange rates directly, forex traders can take advantage of it and earn profits depending on predictions. Additionally, inflation can lead to higher input costs for exports, which then makes a nation’s exports less competitive in the global markets. In the long term, interest rates also play an important role in shaping currency values. Long-term interest rates are influenced by a variety of factors, including inflation expectations, economic growth prospects, and global market conditions.

When a country consistently maintains higher long-term interest rates, it can more easily attract long-term investment. Investors may have greater confidence in these higher, stable returns over an extended period. In a floating exchange rate system, the value of a currency constantly changes based on supply and demand in the foreign exchange market. If the value appreciates (or goes up), the demand for the currency also rises. So, a currency’s value appreciates/goes up if the demand for it goes up more than the supply does.

The information in this site does not contain (and should not be construed as containing) investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. IG International Limited is licensed iq option broker review to conduct investment business and digital asset business by the Bermuda Monetary Authority. Discover how to take a position on the world’s largest financial market. Another cause of appreciation (or depreciation) of a currency is speculative movements of funds in the belief that a currency is under- (or over-)valued and in anticipation of a “correction”.

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