Currency depreciation happens when the value of a country’s currency decreases compared to other currencies in a floating exchange rate system. This means the currency becomes “weaker” and has less purchasing power internationally.

Why it happens (increased supply of currency):

• Lower interest rates: Fewer foreign investors choose to save money in that country.
• High import demand: More of the domestic currency is sold to buy foreign goods.
• Negative speculation: Investors lose confidence and sell the currency.
• High inflation: Rising prices at home make the currency less attractive.

Effects on the economy:

• Exports become cheaper: Foreign buyers can buy more domestic goods for less money.
• Imports become more expensive: Buying goods from other countries costs more.
• Higher inflation: Because imports are more expensive, the overall cost of living may rise.
• Improved trade balance: Often, exports increase and imports decrease, helping reduce a trade deficit.
• Borrowers benefit: It becomes easier to pay back existing debts in real terms.