Appreciation of Currency
An appreciation of a currency means that it becomes worth more relative to other currencies. It means there has been a rise in the exchange rate.
For example in recent years there has been an appreciation in the pound compared to the dollar
in 2006 £1 = $1.8
In 2007 £1 = $2
The Pound has appreciated - it means you now get more dollars for £1. It means US goods will appear cheaper to UK consumers.
The effect of an appreciation
- US imports are cheaper for UK consumers,
- UK tourists are able to buy more goods for the same amount of sterling.
- UK exports appear more expensive to US consumers.
- An appreciation could reduce domestic demand in the UK because we export less and import more.
The opposite of an appreciation is a deprecation.
Impact of Appreciation
If the currency appreciates due to speculative flows, it can cause problems for the economy. Exports will become uncompetitive, leading to lower domestic demand.
See: Problems of overvalued exchange rates
Related
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