posted by hadley on .
I'am getting really confused with exchange rates. Like when a currency appreciates, what does that mean? Are the foreign goods more expensive or cheaper? How about when it depreciates? It would be helpful if somebody gave me a quick lesson on this. Thanks.
When a currency (let's say the dollar) appreciates relative to another currency, it is worth more of the of the other country's currency and prices of that country's goods usually become cheaper. Conversely, the prices of the goods sold to the foreign country usually go up, since they must spend more of their money to get the dollars needed to buy the product. However, sometimes manufacturers in the country with the appreciating currency will lower their prices to keep market share.
The opposite it true if a currency depreciates, as has been happening with the dollar for the last five years or so. The dollar has fallen relative to most major (and some minor) world currencies during that time.. even the Mexican peso, Russian ruble, and the Croatian kuna.
Usually whether a currency is appreciating or not is based upon an average of its value compared to currencies of the major world economies, especially the Yuan, Pound, Yen and Euro.