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Currencies - Factors Causing a Currency Depreciation

Level:
AS, A Level, IB, BTEC Level 3, BTEC Tech Award
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

This revision video analyses some of the main causes of a currency depreciation for a country using a floating exchange rate system

Currencies - Factors Causing a Currency Depreciation

What is a currency depreciation?

A depreciation is a fall in the external value of one currency against another, for example the Australian dollar might depreciate against the US dollar so that one Australian dollar buys less of the US currency.

The external value of the pound sterling depreciated sharply against the US dollar and the Euro in the immediate aftermath of the 2016 Brexit referendum result

What might cause a currency depreciation?

  1. A fall in the world price of a country's major export. This leads to a decline in export revenues and a fall in overseas demand for the exporting nation's currency
  2. There is a surge in the value of imports causing a deficit on the current account of the balance of payments which then leads to a net outflow of currency, causing exchange rate weakness
  3. A country's central bank reduces interest rates, leading to a net outflow of hot money - this is short term financial capital that searches for the best risk-adjusted rate of return
  4. Depreciation might be caused by intervention from the Central Bank e.g. it goes into the market to sell their own currency and buy gold and foreign currencies.

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