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- The value of a country's currency depends on many factors, "The value of money is determined by the demand for it, just like the value of goods and services. You can measure the value of money by what people will exchange for it and by how much of it there is" (Amadeo 1).
- Similarly, many different factors impact the value of money or currency in a free market economy, "Factors affecting supply and demand are regulated by the government through monetary and fiscal policy." (CFI 1)
- Through policy, if an economy is regulated under certain conditions, "the country attracts more foreign investment, which in turn helps lower inflation and drive up the country’s currency exchange rate" (Canam, 5).
- However, if a country is importing more than it's exporting, this can create an imbalance and cause negative externalities like inflation to increase. One example is the U.S. Dollar depreciating in value from 200-2011, "That was due to a relatively low federal funds rate, a high federal debt, and a slow-growth economy" (Amadeo 3).
- Hopefully by now, you understand the factors that influence a currency's rate to appreciate or depreciate.
- And have a better understanding of the multiple factors that influence a currency's appreciation and depreciation.
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