APPRECIATION AND DEPRECIATION OF A CURRENCY, WE UNDERSTAND WHY

APPRECIATION AND DEPRECIATION OF A CURRENCY, WE UNDERSTAND WHY


Appreciation and depreciation, let's see what conditions determine the rise or fall of a currency.
Import/export.
If a country's export increases more than its import, this will result in an increase in export revenue and an increase in the national currency, which in turn will lead to a rise in the value of the currency itself (appreciation).
If, on the other hand, exports have a lower rate than imports, the value of the currency will decrease compared to the value of trading partners (depreciation). If a country has a trade deficit (import higher than export), the intervention of foreign investors is necessary to finance the imbalance.



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Investment flows.
Foreign capital appreciates countries with a favourable investment environment. A country with good growth performance will receive capital flows from those countries with worse economic and political conditions. In addition, an unstable policy system can cause a loss of confidence in the national currency, generating an outflow of capital to the currencies of the more stable countries. The effect on currencies of differences in growth between countries is not unambiguous. When a country grows faster than others, it tends to have a high rate of imports to support development. The phenomenon generates an increase in demand for foreign currency if export growth is lower than import growth. In general, an increasing trade surplus increases the demand for the country's currency and its consequent appreciation. In contrast, the trade deficit weakens the currency (depreciation).
Domestic demand.
Weak economic growth, combined with a high rate of unemployment, reduce the propensity to invest and reduce consumer spending. The final effect is a weakening of the value of a nation's currency. However, sometimes the opposite is true. The depreciated currency is able to stimulate exports, with the consequent increase in the employment rate, consumption and investment.
The system - Country.
Everything that produces uncertainty has negative effects on the currency. As for the political system, struggles and turbulence do not make the currency of a country attractive to investors. For example, since the beginning of the crisis in Ukraine, the ruble has depreciated by more than 50%. The conclusion is: a strong economic and political environment is more likely to attract foreign investors. In order to operate in a country, investors must buy its currency, increasing demand and generating its appreciation.
Monetary policy.
The monetary policy of central banks leads to an increase or decrease in the reference interest rate (the cost of money in the national currency). The choice can be dictated by different reasons, for example as a form of protection against inflation or deflation, or, more generally, to keep the economy healthy and growing. If a country suddenly decides to move to an expansionary monetary policy, there are two main effects: 1, falls in real interest rates; 2, acceleration of inflation. Both consequences lead to the depreciation of the currency. Otherwise, as a result of a restrictive monetary policy, there will be an appreciation of the currency.
Interest rates.
Interest rates are the main valuation engine of a currency; financial investors are attracted by expectations of high yields. If investors expect real interest rates in a certain country to rise, they buy the related financial assets. High yields stimulate investors to buy bonds and financial instruments linked to changes in interest rates, such as current account deposits. As a result, the country's currency appreciates. The opposite is true in the case of falling interest rates: lower yields tend to depreciate exchange rates. The interest rate differential between countries reflects differences in economic growth, monetary policy and fiscal policy. Differences in interest rates result in a premium or a discount: the weaker country has higher yields. This is true for interest rates under normal conditions. But if yields are skyrocketing, for example as a result of high debt levels, the result is monetary instability. Investors could suspend their activities in the country and withdraw their money, causing a rapid depreciation of exchange rates.
EXPANSIONARY MONETARY POLICY/CUTTING RATES/VALUE LOSS OF THE CURRENCY. RESTRICTIVE MONETARY POLICY/CUTTING RATES/ENHANCING CURRENCY VALUE.

Inflation rate.
A high rate of inflation is equivalent to a decrease in purchasing power and thus a depreciation of the currency. Moreover, when inflation is expected to rise, the central bank could implement a restrictive monetary policy and raise interest rates as a deflationary instrument. But it is also true that countries with very high inflation generally suffer currency depreciation compared to their trading partners.
Public debt.
Investors usually prefer to limit investments in risky assets. High public debt can be worrying for foreign investors, for example if there is a fear of the country's bankruptcy. They will then sell the bonds in the currency of the country at high risk of default. The consequence of the increased supply of that currency will lead to a fall in its value. Currencies with a low risk are much more valued than the high risk currency.


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Simo76

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technical analysis for beginners
technical analysis for beginners

Simple technical analysis following the price movement

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