Exchange Rates
Introduced| English | Meaning |
|---|---|
| currency/ˈkʌrənsi/ | The money used in a particular economy, especially its notes, coins and unit of denomination. |
| exchange rate/eksˈtʃeɪndʒ reɪt/ | The price of one currency expressed in units of another currency. |
| Appreciation/əˌpriːʃɪˈeɪʃn/ | A currency becomes *more* valuable — it buys more foreign currency. |
| Depreciation/dɪˌpriːʃɪˈeɪʃn/ | A currency becomes *less* valuable — it buys less. |
| floating exchange rate/ˈfləʊtɪŋ eksˈtʃeɪndʒ reɪt/ | An exchange rate largely determined by currency demand and supply in the foreign-exchange market. |
The price of one currency in another
- An exchange rate 汇率 is the price of one currency 货币 in terms of another.
- For example: how many yuan it takes to buy one US dollar.
- Because it is a price, it can rise or fall like any other.
- Two words describe those moves — and they are easy to mix up.
An exchange rate is:
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It says how much of one currency buys another.
When a currency becomes more valuable and buys more foreign currency, it has ______.
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More foreign currency per unit = appreciation.
One currency can appreciate against another while the other also appreciates against it.
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False. An exchange rate is one price seen from two sides: if one currency appreciates, the other necessarily depreciates against it.
Appreciation and depreciation
- Appreciation 升值 means a currency becomes more valuable — it buys more foreign currency.
- Depreciation 贬值 means a currency becomes less valuable — it buys less.
- The catch: one currency's appreciation is always the other's depreciation.
- If the dollar rises against the yuan, the yuan falls against the dollar.
A floating exchange rate 浮动汇率 set by the demand for and supply of a currency
Appreciation or depreciation?
A currency appreciates when it buys more foreign currency, and depreciates when it buys less. One currency's appreciation is the other's depreciation.
If $1 goes from buying 7 yuan to buying 8 yuan, then:
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Each dollar buys more yuan, so the dollar rose; one currency's gain is the other's loss.
If $1 falls from 7 yuan to 6 yuan, the dollar has:
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Each dollar now buys fewer yuan, so it lost value.
Reading a rate change
- Worked idea. Suppose $1 buys 7 yuan. If$1 now buys 8 yuan, the dollar has appreciated (each dollar buys more yuan) — and the yuan has depreciated.
- If instead $1 falls to 6 yuan, the dollar has depreciated.
- Trick to remember: if your currency buys more foreign money, it appreciated.
- Always name which currency moved — "the dollar appreciated against the yuan."
A floating exchange rate is set by:
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Floating means the market sets it freely, not the government.
Floating rates
- Most major currencies use a floating exchange rate.
- It is set freely by the supply of and demand for the currency in world markets.
- No government fixes it — it moves minute by minute as trading happens.
- The next lesson models exactly how that supply and demand set the rate.
An exchange rate is the price of one currency in another. Appreciation = more valuable (buys more); depreciation = less valuable. One currency's appreciation is the other's depreciation ($1 = 7 \to 8$ yuan means the dollar appreciated, the yuan depreciated). Most rates float, set by supply and demand.
Write from a fall to 4 pesos
- One dollar used to buy 5 pesos. It now buys 4 pesos.
- Say what happened to the dollar.
One dollar used to buy 5 pesos and now buys 4 pesos. Has the dollar appreciated or depreciated?
Fewer pesos per dollar means the dollar lost value.
What happened to the dollar?
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A dollar buys fewer pesos, 4 instead of 5, so it is weaker.