A currency appreciation is when its value increases comparing with another currency.
The value of the currency is measured by its exchange rate against another currency. Its value will rise, which will be reflected in rising price of that currency, or rising exchange rate, when demand for the currency exceeds supply.
With higher value, now, one unit of the currency will buy more units of another currency. For example, if USD$1 rises from RMB6.5 to RMB7, the value of the USD$ has appreciated. One USD$ will now be able to buy more RMB, or more products in China.
The opposite to appreciation is depreciation.
Appreciation of the currency – Winners & Losers
When a domestic currency appreciates, the exchange rate of that currency rises. It is more difficult to sell domestic goods and services to customers in other countries, because domestic products become more expensive for overseas buyers.
Winners of appreciation? Importers
The businesses that gain from appreciation are:
- Importers of raw material. Imports will be cheaper making cost of imported raw materials to fall.Businesses relying on imported raw materials to produce, will benefit from reduced costs. This increases their price competitiveness.
- Importers of ready products. Importers of ready goods and services will be able to bring the products into the country more cheaply in terms of domestic currency. Wholesalers and retailers that purchase foreign products will see the prices of these imports declining, so they might stop trading with domestic suppliers of similar, but more expensive products.
Losers of appreciation? Exporters
The businesses that lose from appreciation are:
- Exporters of ready products. Businesses which export overseas may suffer from reduced sales. Exported products are now relatively more expensive overseas, hence this may decrease demand. This will include many manufactured goods such as food, clothes or cars. Some businesses may choose to lower prices, reduce employment, or even locate overseas to avoid the high exchange rate. Also, domestic tourism will experience a fall in demand from overseas tourists because of the higher prices of services in terms of the foreign currency.
- Businesses selling domestically, but with foreign competitors. As appreciation makes imports cheaper, it will make domestic manufacturers less competitive in their home market. Consumers will be prepared to switch to imported goods and foreign holidays because of the cost advantages they have over domestic products. Businesses that sell in the domestic market will experience more price competition from importers as prices of imported goods and services are likely to fall on the domestic market.
Effects of appreciation of currency on the country
Essential items generally do not get affected by fluctuations in exchange rate. More imports may lead to decrease in Trade Balance in the Balance of Payments. Less exports may result in fall in GDP and unemployment in the affected sectors.
