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 an appreciation in the Dollar compared to the Euro.
- In late 2010 €1 = $1.20
- By mid 2011 €1 = $1.45
- Therefore in this period, the Euro appreciated in value against the dollar.
- This compares to 2014 – where the Euro fell in value against the dollar.
The effect of an appreciation in the dollar
- Imports into the US are cheaper for US consumers
- US exports are less competitive when selling to the Eurozone
- An appreciation will tend to reduce inflation – because imports are cheaper and there will be a reduction in aggregate demand (AD)
- It is likely to worsen the current account on balance of payments