What is currency appreciation? - Definition & Examples for FX Traders
People active in trading currency pairs may experience currency appreciation almost daily. Nevertheless, few traders are able to fully explain the term currency appreciation. The following article looks at the definition and also covers these topics:
- Why can currency appreciation occur?
- Have there been any striking examples of currency appreciation recently?
- What are the advantages and disadvantages?
- Are there opportunities and risks for participants in forex trading as a result of currency appreciation?
First, we define the term currency appreciation for you in a way that is as easy to understand as possible.
What is currency revaluation?
The answer is actually already hidden in the word, it is the appreciation of one currency in relation to another. Since currencies are always traded in pairs on the foreign exchange market, appreciation and depreciation occur simultaneously.
Appreciation can only occur in a currency with an unpegged exchange rate. In a confederation of states with a single currency, it is not possible for any country to make its means of payment more or less expensive.
Currency appreciation in mt4 download can occur through various events. It is either the result of trade or supply and demand or the result of an intervention by the responsible central bank. Regardless of the cause, the appreciation of a currency always has consequences for the appreciating country.
What are the reasons for currency appreciation?
Theoretically, there are several reasons for the revaluation of a currency, but in practice it is seldom implemented because the associated consequences are feared.
A country wants to make its exports more expensive
As mentioned above, in practice no competitive country will risk making its exports more expensive. Unless it has a monopoly and does not have to fear competitors.
If the euro is revalued by 10%, export products in the United States automatically become more expensive by the same percentage.
Conversely, all US goods in the Eurozone would become 10% cheaper. However, European consumers have little to gain from this, because few products from the United States are bought in Europe.
It is of no use to anyone if products from the USA only cost 83 euros after the revaluation instead of 100 euros. This is because the demand for products made in the USA is very low in European countries.
The best example is the decreasing attractiveness of American cars. German, Italian or English cars are more reliable, consume less fuel and live longer.
The only reason for an appreciation of the euro would be that it would make oil imports cheaper. Crude oil has to be purchased in US dollars until today. Countries acting against this instruction had and still have to fear considerable consequences.
Holidays would become 10% more expensive for travellers with US dollars as their original currency in the Eurozone. However, no EU country would accept a resulting reduction in the number of visitors.
Accordingly, there is no sensible reason in modern times for a currency revaluation on the part of a central bank. On the contrary, the devaluation of a currency makes much more sense for the devaluing country.
The instruments of currency revaluation and currency devaluation were unnecessary and therefore unknown in the past, as a look at history shows.