Economics – International trade and globalisation - Foreign exchange rates | e-Consult

Appreciation: Appreciation refers to an increase in the value of a currency relative to another currency. For example, if the British Pound appreciates against the US Dollar, it means that one Pound can buy more Dollars than it could previously.

Depreciation: Depreciation refers to a decrease in the value of a currency relative to another currency. For example, if the Japanese Yen depreciates against the Euro, it means that one Yen can buy fewer Euros than it could previously.

Reasons for Appreciation:

• Increased Demand for Exports: If a country's exports become more competitive (e.g., due to lower prices or higher quality), demand for its goods and services will increase. This will lead to increased demand for its currency, causing it to appreciate.
• Increased Foreign Investment: If foreign investors believe a country offers good investment opportunities (e.g., high returns, stable political environment), they will invest in that country. This will increase demand for the country's currency, causing it to appreciate.

Reasons for Depreciation:

• Increased Imports: If a country's imports increase significantly, demand for its currency will fall as it needs to buy foreign currency to pay for those imports. This will lead to depreciation.
• Economic Downturn: During an economic downturn, investor confidence may fall, leading to capital flight (money leaving the country). This will decrease demand for the country's currency, causing it to depreciate.