What is Depreciation of Currency?
Currency Depreciation refers to a decrease in the value of a currency as compared to other currencies in a floating exchange rate system. Market forces of demand and supply work towards the depreciation of the currency and determine a currency depreciation rate. The country’s trade exports and trade imports play an important role in determining the currency depreciation rate. The value of a currency is basically determined by its economic conditions along with exports and imports. It affects other economic decisions and the financial market.
Key Takeaways:
- Currency depreciation refers to a decline in the value of a currency as compared to other currencies, only in a floating exchange rate system, not in a fixed exchange rate system.
- Factors leading to currency depreciation include political instability, trade exports and imports, other macroeconomic variables, etc.
- Currency depreciation generally occurs when there is a significant increase in imports of a country, affecting the domestic balance outflow. A situation of inflation arises in the home country donating higher interest rates.
Table of Content
- Reasons for Depreciation of Currency
- Example of Depreciation of Currency
- Effects of Depreciation of Currency
- Critical Evaluation of Depreciation of Currency
- Depreciation of Currency – FAQs