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What are the causes of currency depreciation?

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Quick Answer

According to Investopedia, currency depreciation is caused by inflation. When the price of goods in one country increases, people choose to buy goods from a foreign country where the price of the good is relatively lower, which causes the currency to depreciate.

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What are the causes of currency depreciation?
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Full Answer

EconomicsHelp.org states that lower inflation rates cause an appreciation in the value of a currency, while higher inflation rates cause a depreciation. In addition to inflation rates, the value of a currency is also affected by changes in interest rates, speculation, economic growth and government debt. Lower interest rates cause a depreciation of the currency, while higher interest rates cause an appreciation. Similarly, if speculators believe that the value of a currency will rise in the future, an increase in demand for that currency will rise and cause the currency to appreciate. On the contrary, if speculators expect the value to decrease in the future, the currency will depreciate. Depreciation also occurs when a country experiences a recession or when governments enact policies to influence the value of their currency.

According to Investopedia, changes in income also affect the value of a currency. If a country consumes more imported goods than exported goods, the value of the currency depreciates relative to the foreign country's currency.

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