The depreciation of a currency happens when people trade currency internationally and they find that a single currency is worth less than it was before. Many different factors can cause a currency to depreciate. In some cases, depreciating currency is not limited to the world market. Currency can also devalue within a nation, causing inflation.
Ø A depreciation currency is a currency that is worth less compared to another nation's currency.
Example of Depreciation
Ø Country X and country Z had the exact same exchange rate. So for every $1X, you would receive $1Z. One day you attempt to make an exchange. You hand over one $1X and receive $.50Z in return. This means that country X is the depreciation currency because now it is worth less than the currency of country Z. One dollar of country X is now worth approximately half of country Z's dollar.
Devaluation
Ø One economic policy that can cause depreciation is active devaluation. Sometimes a country will lower the value of its currency (creating a depreciated currency) to increase the cost of imported goods, and lower the cost of internal goods. This often leads to hyperinflation.
Inflation and Hyperinflation
Ø Inflation is a natural economic concept where the value/cost of goods and services rises over a period of time. The value/cost is determined by a single currency as inflation is measured by comparing past prices with new prices within the same currency. Hyperinflation denotes an inflation rate that is incredibly high and cannot be controlled. Under conditions of hyperinflation, money can become worthless within a matter of months. The most common historical example of hyperinflation is the German mark after World War I. After Germany adopted a devaluation economic policy, hyperinflation began to result. A loaf of bread that cost 164 German marks in 1922 cost 200,000,000,000 German marks by the end of 1923. The German mark being worth so little, it was a depreciated currency on the Foreign Exhange Market.
Rising Currency of Other Nations
Ø If another nation's currency increases on the Foreign Exchange Market, it can cause other currencies to depreciate through no fault of these other national currency holders.
Other Causes of Depreciation Currency
Ø Money is traded in a market (much like stocks) called the Foreign Exchange Market. People will buy and sell currencies much like the stock market. This market can cause a currency to increase or depreciate, depending on whether or not people are buying the currency. A country's political conditions, business and trade policies and foreign affairs positions are just as important as a country's economic policies when people make decisions about whether or not to buy that country's currency on the Foreign Exchange Market. A currency that people want to buy and hold is a currency that will increase. A currency that is sold, or not bought, will be a depreciation currency.
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