Depreciation And Appreciation Of Currency
Depreciation:
- In the foreign exchange market, it is a situation when domestic currency loses its value in front of foreign currency.
- In the floating exchange rate regimes, the value of a country’s currency is determined by the market forces of demand and supply.
- A currency depreciates with respect to foreign currency when the supply of currency in the market increases while its demand falls.
Reasons for Currency Depreciation
1) Declining exports leads to a fall in export revenues and thus the demand for country’s currency reduces and it depreciates.
2) A large increase in imports due to increased demand for imported goods can weaken the exchange rate due to the net outflow of currency.
Appreciation:
- In the foreign exchange market, if a free-floating domestic currency increases its value against the value of foreign currency, it is appreciation.
- Appreciation of currency takes place when the supply of the currency is lesser than its demand in the foreign exchange market.
- If a Government sells sovereign bonds, it will lead top inflow of foreign capital (say in $); thus the supply of $ will increase leading to the appreciation of currency.
- Current Account Surplus can cause an inflow of foreign exchange in the economy leading to appreciation in the exchange rate of the domestic currency.
- Increase in exports can increase the demand for the domestic currency leading to its appreciation with respect to foreign currencies.
-Higher economic growth can increase foreign investment in the economy which can cause appreciation in the exchange rate.