Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials , political instability, or risk aversion among investors.
Countries with weak economic fundamentals, such as chronic current account deficits and high rates of inflation, generally have depreciating currencies. But an abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further, leading them to pull portfolio investments out of the country.
These actions will put further downward pressure on the currency. Easy monetary policy and high inflation are two of the leading causes of currency depreciation. When interest rates are low, hundreds of billions of dollars chase the highest yield. Expected interest rate differentials can trigger a bout of currency depreciation. Central banks will increase interest rates to combat inflation as too much inflation can lead to currency depreciation.
Additionally, inflation can lead to higher input costs for exports , which then makes a nation's exports less competitive in the global markets. This will widen the trade deficit and cause the currency to depreciate. In response to the global financial crisis of , the Federal Reserve embarked on three rounds of quantitative easing QE , which sent bond yields to record lows.
The U. So part of the depreciation in dollar value we see today versus a year ago is simply the reversal of that trend, as vaccines are rolled out, lockdowns are lifted, economies revived, and the crisis subsides. It is simply money moving away from that safe asset again.
Another contributing factor is the fiscal stimulus provided by the U. Fiscal stimulus essentially puts more dollars in the market, driving the supply and demand of the currency. Plus, according to Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors, that recovery funding is being financed, in part, by quantitative easing.
The depreciation has been compounded by monetary stimulus. According to James Malcolm, head of FX Strategy in Global Research at UBS, the dollar had previously been relatively high-yield compared to other G10 currencies, but fell to "pretty much the bottom of the pile. Homeowners Should Consider an Auction. Yun said. Liam Bailey, global head of Knight Frank's research department, said that, while other economic factors are at play, the difference in foreign exchange is significant.
For prospective investors, a central question is when the dollar will begin to increase again in value. A more dramatic historical example happened in Asia in , when the collapse of the Thai baht affected most Southeast Asian currencies and caused their value to decline sharply.
Currency depreciation can occur for a variety of reasons. Broadly these include changes in inflation rates, political instability and other economic factors. More specifically, some of the leading causes of currency depreciation are:. Currency depreciation enables forex traders to profit, or causes them to lose, as the currency values fluctuate.
If the price of the euro did fall, the position would incur a profit. But if the euro increased in value instead, they would suffer a loss. If the trader had taken a long position instead, they would do so in the hope that the euro appreciated against the dollar.
If the euro increased in price, they could close their position for a profit. Discover how to trade with IG Academy, using our series of interactive courses, webinars and seminars. Go to IG Academy. Compare features. Your Industry. In Focus: Passive Investing. Financial Adviser.
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