Currency Depreciation

What is 'Currency Depreciation'

Currency depreciation is a decrease in the level of a currency in a floating exchange rate system due to market forces. Currency depreciation can occur due to any number of reasons – economic fundamentals, interest rate differentials, political instability, risk aversion among investors and so on. Countries with weak economic fundamentals such as chronic 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 trade deficit over time. But abrupt and sizeable currency depreciation may scare foreign investors who fear the currency may fall further, and lead to them pulling portfolio investments out of the country, putting further downward pressure on the currency.

BREAKING DOWN 'Currency Depreciation'

Easy monetary policy and high inflation are two of the main causes of currency depreciation. In a low interest-rate environment, hundreds of billions of dollars chase the highest yield. Expected interest rate differentials can trigger a bout of currency depreciation.

In the 12 months ending January 2014, for example, the Canadian dollar depreciated by 10% against the U.S. dollar. This was because economists and analysts expected the Bank of Canada to relax its monetary policy in 2014, at the same time the Federal Reserve was preparing to scale back its bond purchases, which was seen as a precursor to tighter monetary policy.

Inflation can also cause currency depreciation. This is because the higher input costs for export products made in a high-inflation nation will make its exports uncompetitive in global markets, which will widen the trade deficit and cause the currency to depreciate.

Sudden bouts of currency depreciation, especially in emerging markets, inevitably raise the fear of “contagion,” whereby many of these currencies get afflicted by similar investor concerns. There have been a number of such episodes, among the most notable being the Asian crisis of 1997 that was triggered by the devaluation of the Thai baht. In the summer of 2013, the currencies of nations such as India and Indonesia traded sharply lower on concern that the Federal Reserve was poised to wind down its massive bond purchases.

RELATED TERMS
  1. Accumulated Depreciation

    The cumulative depreciation of an asset up to a single point ...
  2. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  3. Depreciable Property

    Any type of asset that is eligible for depreciation treatment. ...
  4. Weak Currency

    A currency with value that has depreciated significantly over ...
  5. Bonus Depreciation

    An additional amount of deductible depreciation that is awarded ...
  6. Appraisal Method Of Depreciation

    A form of depreciation calculation that is based upon appraisal ...
Related Articles
  1. Forex Education

    Top Economic Factors That Depreciate The $US

    A variety of factors contribute to currency depreciation, including monetary policy, inflation, demand for currency, economic growth and export prices.
  2. Professionals

    Capital Cost Allowance And Depreciation

    Depreciation can be used as a tax deduction.
  3. Professionals

    Depreciation

    CFA Level 1 - Depreciation. Summarizes the methods of depreciation, including the sinking-fund approach, and their impact on financial statements, taxes and ratios.
  4. Forex Education

    What Is A Currency War And How Does It Work?

    We look at what a currency war is, what factors may lead to it, the impacts of such a strategy, and whether there is a currency war currently.
  5. Professionals

    Depreciation Accounting

    CFA Level 1 - Depreciation Accounting. This sections covers depreciation accounting. Includes formulas and sample calculations for a few common methods of finding depreciation.
  6. Professionals

    Types Of Depreciation

    These are types of depreciation that companies face.
  7. Professionals

    Depreciation

    Depreciation
  8. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  9. Professionals

    Currency Appreciation and Depreciation

    CFA Level 1 - Foreign Exchange Parity Relations - Influences. Learn how budget deficits can lead to trade deficits and the various causes behind currency depreciation and appreciation.
  10. Forex Education

    Effects Of Currency Fluctuations On The Economy

    Huge movements in a currency can dictate an economy’s fortunes. In a manner of speaking, the currency becomes the tail that wags the dog.
RELATED FAQS
  1. What are key benefits to a country that has engaged in a policy of currency depreciation?

    Learn about key benefits to a country engaging in a policy of currency depreciation, such as smaller trade deficits, employment ... Read Answer >>
  2. What is the relationship between accumulated depreciation and depreciation expense?

    Understand the relationship between accumulated depreciation and depreciation expense. Learn how each one is accounted for ... Read Answer >>
  3. How does accumulated depreciation affect net income?

    Learn why accumulated depreciation does not directly affect a company's net income; understand where a company accounts for ... Read Answer >>
  4. Is depreciation only used for tangible assets?

    Learn if tangible assets can be depreciated, as well as what other assets are eligible for depreciation so you can account ... Read Answer >>
  5. What is the tax impact of calculating depreciation?

    Understand the tax implications of a company's depreciation. Learn how differences in accounting methods change the amount ... Read Answer >>
  6. Why was the practice of depreciating assets for accounting purposes created?

    Read about why the practice of depreciation was created and how the uses of depreciation have morphed to adapt to technological ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center