Why Are Appreciating Currency Rates A Major Concern?

When a currency appreciates, you get ma ore favourable currency rates against other currencies but this could have negative impact on the country’s economy.

When your home currency gains in value against other currencies it appreciates meaning that the same amount of it is able to purchase a larger amount of a particular foreign currency. It is good news for a traveller planning to visit a country whose currency is depreciating against his home currency or for a migrant worker who intends to send money to his relatives abroad. Broadly speaking, appreciation means that if last week your one British pound was in parity to the U.S. dollar (1 pound buys 1 dollar) and the pound appreciated by 30 per cent during the week, now you will be able to purchase 1.3 U.S. dollars for your one pound.

This is an over-simplification of the process of appreciation of the currencies, though. The home currency rates go up when a currency appreciates but these foreign exchange rate fluctuations affect not only the value of the home and destination currencies but the entire economy as well. Higher currency rates i.e. appreciation of the currency means that the country’s exports become more expensive and imports cheaper, boosts demand for imported goods but lowers domestic exports. A process of currency appreciation could trigger a demands for lowering the costs of production and may lead to freezing of wages in the country whose currency becomes too expensive. Sometimes entire industries can be forced to move their production facilities abroad to take advantage of the lower production costs and more advantageous currency rates of the local currency.

Many governments around the world are apprehensive of appreciations of their national currency and forcedly restrain the national currency from making substantial gains against the major world currencies. Between 1985 and 1992, the currency exchange rate of the Japanese yen against the U.S. dollar rose from 254 yen per dollar to about 110 yen per dollar and the government in Tokyo was forced to intervene in the market to support the dollar in order to protect the competitive prices of the Japanese export to the United States. Many governments follow the example of Japan to save the competitiveness of their national economies and this is a good illustration of a widespread opinion that the high currency rates possess risk of economy downturn.

During the past decades, China has become a good illustration of a country, which keeps its currency undervalued supporting market currency rates that are lower than the real value of its home currency in order to deliver cheap exported goods to the outside world. It is not necessarily a bad thing or a bad policy although many developed countries including the U.S. and the European Union complain that China should untie the yuan and let it float free on the financial markets. The global political and economic chessboard is subject to rules other than the basic rules of the market economy, though. In this global game, the currency rates and the appreciation or depreciation of a currency can be a hostage of long-term interests, which are often in conflict with the real market value of a currency and the present currency rates.