A currency slipping, buying less:depreciation, nothing more or less.
A decrease in the value of a currency relative to another currency.
When a currency depreciates, it buys less of another currency than before.
In plain words
A currency depreciates when it loses value against another currency, so that it buys less of that currency than before. The word is used for moves in a market-set exchange rate; a deliberate lowering of a fixed rate by a government is called a devaluation.
See it move
The line is moving sideways
Why it matters
Depreciation makes imports and foreign travel dearer and makes exports cheaper for buyers abroad. For a trader, a depreciating base currency appears as a falling quote for the pair.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
In an invented example GBP/USD moves from 1.2500 to 1.2000.
- 1Change = 1.2500 − 1.2000 = 0.0500 = 500 pips lower
- 20.0500 ÷ 1.2500 = 0.04 = 4%
- 31,000 pounds bought 1,250 US dollars before and buy 1,200 after
The pound has depreciated 4% against the dollar: the same 1,000 pounds now buy 50 fewer dollars.
A common mistake
The percentages are not the same for the two currencies. If the pound loses 4% against the dollar, the dollar has gained about 4.2% against the pound, not 4%.
Check yourself
Educational information, not investment advice or a recommendation to trade.