What are The Causes of Currency Devaluation / Depreciation? Currency depreciation is a situation where the value of a specific currency falls in relation to other world currencies. There are many factors which impact the currencies on a continuous basis. Political, social, monetary. Currency depreciation increases the cost of doing business in the international market. It also increases exports.
Some of the Factors of the Depreciation:
There are some of the reasons as to why a currency depreciates. Let us have a look at some of the essentials factors which cause currency depreciation. They are the following:
The Economic Conditions:
When the world demand for a country’s exports become low, the value of that particular currency tends to fall. Whereas, if the currency’s imports are high, then a currency experiences a trade deficit and the value of its currency also falls.
Supply of the Currency:
The law of supply operates here as well in case of the currency valuation. For example, if the currency’s supply is greater than its demand then currency loses its value and the increased money supply causes the currency depreciation. Thus, high supply of a local currency in the international market also causes the value of the currency to depreciate.
Inflation as you know, inflation is the gradual increase in the price of goods and services and this increase lowers the purchasing power of the particular currency. The gradual increase in the inflation causes the particular currency to depreciate.
The trade deficit is also one of the reasons of currency depreciation. The trade deficit occurs when the value of imported goods of a country is greater than the value of the exported goods. Due to the trade deficit, the currency of the country depreciates against the trading country’s currency. That is how the imports for the currency become more expensive and the country should avoid unnecessary imports. However, some of the imports are unavoidable.
Huge Amount of Foreign Debt:
The local industrialists who finance their business with the funds borrowed from abroad are the main reasons behind the increased demand for US dollars when it comes to repaying the loan. That is how the demand for US dollars increases and it causes the opposite currency to depreciate because of the supply of that local currency increases in the international market then.