Question

Describe at least five factors which can cause a currency to depreciate

Answer 1

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

factors

1. Supply and Demand-. If a country injects new currency into its economy, it increases the money supply. When there is more money circulating in an economy, there is less demand. This depreciates the value of the currency.

2. Inflation and Deflation-Inflation occurs when the general prices of goods and services in a country increase. Inflation causes the value of the dollar to depreciate, reducing purchasing power.

3. Economic Outlook-If a country’s economy is in a slow growth or recessionary phase, the value of their currency depreciates. The value of a country’s currency also depreciates if its major economic indicators like retail sales and GDP, are declining.

4. Trade Deficits-A trade deficit occurs when the value of goods a country imports is more than the value of goods it exports. When the trade deficit of a country increases, the value of the domestic currency depreciates against the value of the currency of its trading partners.

5. Relative Interest Rate-Interest rates of a country is in a way acts as an indicator of the return on the capital. A higher inflation-adjusted interest rate in a country attracts foreign capital, which in turn causes the exchange rate to appreciate. Similarly, lower net interest rates can cause depreciation of the currency.