What Is Appreciation?
Appreciation, in general terms, is an increase in the value of an asset over time. The increase can occur for several reasons, including increased demand or weakening supply, or changes in inflation or interest rates. This is the opposite of depreciation, which is a decrease in value over time.
Currency appreciation refers to the increase in the value of one currency against another.
For instance, when the EUR/USD exchange rate moves from 1.05 to 1.10, it means that the euro has appreciated by $0.05 against the US dollar.
One euro now costs $1.10 instead of $1.05.
There are many reasons why a currency appreciates.
Monetary and fiscal policy, interest rates, inflation, the trade balance, other countries’ economic strength, tourism figures, political stability, and many other macroeconomic conditions contribute to exchange rate fluctuations and the appreciation of a currency relative to other currencies.
Currency appreciation, like currency depreciation, has immediate consequences for international trade, which affects businesses operating with foreign currencies.
Currency appreciation means lower returns for export companies with foreign currency exposure, while it represents lower costs for importers.
In contrast, currency depreciation allows exporters to lower prices and make their products more competitive, and it is observed as a disadvantage for importers because it increases their costs.