Currency appreciation occurs when the exchange rate of a country’s currency rises in a floating exchange rate system. This means the currency becomes stronger or more valuable compared to other currencies.

Why it happens (increased demand for the currency):

• Higher interest rates attract foreign capital inflows
• Strong export demand from the domestic economy
• Positive speculation that the currency will rise further
• Higher relative inflation in other countries

Effects on the economy:

• Imports become cheaper: Foreign goods cost less in domestic currency terms
• Exports become more expensive: Domestic goods cost more for foreign buyers
• Inflationary pressure eases: Cheaper imports reduce the general price level
• Current account worsens: Exports fall and imports rise, potentially increasing a trade deficit
• Consumers benefit: Purchasing power increases when buying foreign goods