Depreciation and Appreciation

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 is a decrease in the value of that country's
currency. If the Canadian dollar depreciates relative to the euro, the exchange rate (the
Canadian dollar price of euros) risesit takes more Canadian dollars to purchase 1 euro
(1 EUR=1.5CAD 1 EUR=1.7CAD). If the Canadian dollar depreciates relative to the
euro, the Canadian dollar becomes more competitive because the price of Canadian
goods when exchanged to euro will be cheaper leading to a larger Canadian export.
Oppositely, a European country that designates its goods and services in euros will
have lost competitiveness to the Canadian dollar; thus, the price of European products
designated in Euros will become more expensive in Canada. Exports are cheaper
(imports higher).
The appreciation of a country's currency is 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=1.5CAD 1 EUR=1.4CAD). 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. Exports are higher (imports cheaper).
How currency appreciates: Any currency appreciates whenever its demand
increases (i.e. its value in the world market increases). The increase in demand
can occur in these 3 ways: 1. When a countrys exports are high, its currencys
demand increases for transactional purposes. 2. Whenever a Central Bank
increases the interest rates, the demand for the currency increases, as people will
try to exchange another currency for that one to deposit it into the banks and get
higher returns. 3. When employment and the per-capita income in a country
increase, the demand for goods and services will increase and thus the demand
for that countrys currency in the local market does too.