The Exchange Rate, Appreciation & Depreciation of Currency

Exchange rate of a currency means the price of one currency in terms of another currency. It is either fixed or floating. Central banks of a country decides fixed exchange rate whereas floating exchange rates are decided by market forces of demand and supply. The most widely tracked exchange rate in India is USD/INR rate. The INR/USD exchange rate is determined by market forces of demand and supply.

A USD/INR rate means that the price of one US Dollar in terms of rupee. If USD/INR rate 60, it means that the price of one US Dollar is Rs. 60.

Central bank of any country widely chases reference rates of four currencies i.e. the USD, the Euro, the Japanese Yen and UK Pound sterling;

When foreigners invest in any country and it has an export growth then value of currency of that country appreciates and if it imports too much goods and services and outsiders sell their investments in that country, then value of currency depreciates.

Exporters and global investors supply dollars into home country whereas importers and global investors who take money out of home country demand dollars.

When currency of any country has appreciated, it means that natives of that country become able to buy more goods from other countries.

Generally, appreciation of currency is good for importers and bad for exporters whereas depreciation of currency is good for exporters and hurts importers.