For instance, when the EUR/USD exchange rate moves from 2.05 to 2.10, it means that the euro has appreciated by $0.05 against the US dollar. One euro now costs $2.10 instead of $.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 all 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 for importers, it represents lower costs.
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.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.