What Is Currency Depreciation?

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, 澳洲幸运5官方开奖结果体彩网:interest rate differentials, political instability, or risk aversion amongꦏ investors.

Understanding Currency Depreciation

Countries with 澳洲幸运5官方开奖结果体彩网:weak economic fundamentals, such as chronic 澳洲幸运5官方开奖结果体彩网:current account deficits and high rates of inflation, generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its 澳洲幸运5官方开奖结果体彩网:trade deficit over time. 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 澳洲幸运5官方开奖结果体彩网:downward pressure on the currency.

Easy 澳洲幸运5官方开奖结果体彩网: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. 澳洲幸运5官方开奖结果体彩网:Central banks will increase interest rates to combat inflation as too much inflat🌼ꦰion can lead to currency depreciation.

Additionally, inflation can lead to higher input costs for exports, whichꩲ then makes a nation's exports less competitive in the glob🥃al markets. This will widen the trade deficit and cause the currency to depreciate.

Quantitative Easing and the Falling USD 

In response to the global financial crisis of 2007-2008, the 澳洲幸运5官方开奖结果体彩网:Federal Reserve embarked on three rounds of 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE), which sent bond yields to record lows. Following the Federal Reserve's announcement of the first round of QE on Nov. 25, 2008, the 澳洲幸运5官方开奖结果体彩网:U.S. dollar (USD) began to depreciate. The U.S. dollar index (USDX) fell by more than 7% in the three weeks after the commencement of QE1.

In 2010, when the Fed embarked on QE2 the result was the same. During the 2010 to 2011 USD depreciation, the 澳洲幸运5官方开奖结果体彩网:greenback hit all-time lows against the Japanese yen (JPY), the Canadian dollar (CAD), and the Australian dollar (AUD).

Political Rhetoric and Currency Depreciation

While economic fundamentals for the most part determine the value of a 🐼currency, political rhetoric can cause a currency to ꦡfall as well.

Between 2015 and 2016, the U.S. and China were repeatedly in a battle of words with regards to each other’s currency value. In August 2015, the 澳洲幸运5官方开奖结果体彩网:People’s Bank of China (PBOC) devalued the country’s currency, the yuan, by roughly 澳洲幸运5官方开奖结果体彩网:2% against the U.S. dollar. Chinese officials said the 🐎move w♚as required to prevent a further slide in exports.

In 2019, the Trump administration labeled China a currency manipulator, saying Chinese officials were purposely devaluing its currency, leading to unfair advantages on trade. In 2018, U.S.-China political rhetoric turned toward 澳洲幸运5官方开奖结果体彩网:protectionism that res🐠ulted in a long-term trade dispute between the world’s two largest economies.

Volatility and Currency Depreciation

Sudden bouts of currency depreciation, especially in emerging markets, inevitably increase the fear of "澳洲幸运5官方开奖结果体彩网:contagion," whereby many of these currencies get afflicted by similar investor concerns. Among the most notable was the Asian crisis of 1997 that was triggered by the collapse of the Thai baht that caused a sharp 澳洲幸运5官方开奖结果体彩网:devaluation in most Southeast Asian currencies. 

In another example, the currencies of nations such as India and Indonesia traded sharply lower in the summer of 2013 as concern grew that the Federal Reserve was poised to wind down its massive bond purchases. Developed market currencies can also experience periods of extreme volatility. On June 23, 2016, the 澳洲幸运5官方开奖结果体彩网:British pound (GBP) depreciated over 10% against the U.S. dollar after the U.K. voted to leave the European Union, referred to as Brexit.

Example of Currency Depreciation

Turkey’s currency, the lira, 澳洲幸运5官方开奖结果体彩网:lost more than 20% of its value aga♎inst the USD in August 2018. A combination of factors led to the depreciation. First, investors grew fearful that Turkish companies wouldn't be able to pay back loans d💖enominated in dollars and euros as the lira continued to fall in value.

Secondly, President Trump approved the doubling of steel and aluminum tariffs imposed on Turkey at a timeඣ when there were already fears about the country’s struggling economy. The lira plunged sharply after Trump released the nཧews via a tweet.

Finally, Turkey’s president, Recep Tayyip Erdogan, did not allow Turkey's central bank to raise interest rates, while at the same time, the country didn't have a sufficient amount of U.S. dollars to defend its currency on 澳洲幸运5官方开奖结果体彩网:foreign exchange markets. Turkey's central bank finally lifted interest rates in September 2018 from 17.75% to 24% to stabilize its currency and curb inflation. 

More recently, in 2020, the lira has been significantly depreciating due to geopolitical risks as a result of Turkey's policies in the Middle East and elsewhere. In October 2020, the Lira sank to historic lows. It dropped beyond 8.05 to the U.S. dollar. The lira lost 26% of its value in 2020 and more than 50% since the end of 2017.