What is currency appreciation?

Keeping world trade running is imperative. It is important that we have a process whereby the value of currency issued by any country can be compared to that of another country. This exchange rate determination process is known as currency valuation.

In previous years, the currency valuation process used to be based on criteria such as the amount of gold bars in the treasury of a particular country. Simply put, the more gold available, the safer the currency was considered. It would be worth more when exchanged for currency issued by a country that held smaller gold reserves. This criterion, often called the gold standard, has not been the norm for nearly a century. Today, there are other factors that influence the currency appreciation process.

Today, currency valuation will involve evaluating the current rate of export of goods and services to other countries, as well as taking into account the rate of receipt of goods and services from other countries. The flow of trade has a direct impact on the appreciation of the currency between two countries. Along with using a current snapshot of import and export rates for goods and services, there is also the indicator of how a given country's currency is purchased. Many entities will buy a country's currency at its current exchange rate, with the expectation that its value will increase relative to other currencies. This expectation, if focused on a particular country's currency, will become a self-fulfilling prophecy, at least in the short term, as demand drives up the appreciation of a particular country's currency.

Of course, other factors also come into play. In particular, natural disasters can have a huge impact on the currency appreciation process. A country that can no longer export essential goods and services and must, for a while, rely on imports to rebuild the domestic economy after natural devastation, will see the country's currency significantly decrease in value, at least in the short term. As conditions within the country improve and the balance between imports and exports becomes more equitable, the currency's appreciation will begin to rise again.

Currency appreciation is simply how we enable trade to continue across the world by determining how our respective currencies will be exchanged for the currencies of other countries. Without this exchange rate appreciation process, we would not be able to enjoy a series of products that we take for granted every day.