Currency Depreciation
A decline in the value of one currency relative to another in the foreign exchange market.
What is Currency Depreciation?
Currency depreciation is when a currency loses value against one or more other currencies. It is distinct from devaluation — depreciation occurs organically through market forces, while devaluation is a deliberate government or central bank action under a fixed exchange rate regime. Depreciation typically results from high inflation, low interest rates relative to other countries, a current account deficit, or loss of investor confidence. A weaker currency makes a country's exports cheaper and more competitive globally, but it raises the cost of imported goods, fueling domestic inflation. Countries with large foreign currency-denominated debts suffer particularly when their currency depreciates because repayment becomes more expensive in local terms.
Example
In 2022, the Japanese yen depreciated more than 20% against the US dollar, reaching levels not seen since the 1990s. The Bank of Japan's decision to maintain ultra-low interest rates while the Fed raised rates rapidly created a large interest rate differential. Investors sold yen to buy higher-yielding dollar assets, driving the depreciation. Japanese exporters benefited from cheaper yen, but Japanese consumers faced higher import prices for energy and food.
Source: Bank of Japan — Exchange Rates