Currency Appreciation and depreciation

1. Currency Depreciation
And Currency Depreciation
Yashavanth G Nayak
Assistant Professor
St Philomena College Puttur

2. 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 Canadian dollar
depreciates relative to the euro, the exchange rate (the Canadian
dollar price of euros) rises: it takes more Canadian dollars to
purchase 1 euro (1 EUR=1.5 CAD → 1 EUR=1.7 CAD).

3. When the Canadian dollar depreciates relative to the euro, Canadian
goods become more competitive on world markets because their
price when exchanged to euro will be lower. The result will be an
increase in Canadian exports. On the other hand, European sellers
that denominate their goods and services in euros will be less
competitive, because European products denominated in euros will
be more expensive in Canada.

4. The appreciation of a country's currency refers to an increase in the value
of that country's currency. Continuing with the CAD/EUR example, if the
Canadian dollar appreciates relative to the euro, the exchange rate falls: it
takes fewer Canadian dollars to purchase 1 euro (1 EUR=1.5 CAD → 1
EUR=1.4 CAD). When the Canadian dollar appreciates relative to the Euro,
the Canadian dollar becomes less competitive. This will lead to larger imports
of European goods and services, and lower exports of Canadian goods and
services.

5. How currency appreciates
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 capita 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.

6. Forward premium (or discount)
Definition
Excess (or deficit) resulting from a forward delivery contract in currency trading.
Formula: [(Forward rate - spot rate)/spot rate] x (360/number of days in the
contract) x 100. A positive percentage value means a forward premium, and
a negative percentage value means a forward discount.

7. Thank You