Currencies grow weaker for many reasons.
International investors describe one currency as strong or weak with respect to another currency. For example, the U.S. dollar may be weak against the Euro, but strong against the Mexican peso. A stronger currency is said to appreciate, whereas a weaker currency depreciates. The reasons countries experience or cause a currency depreciation are numerous: In some instances, depreciation is intentional. In other cases, depreciation is an inevitable consequence of economic policy.
Domestic Economic Policies
The value of an item is often tied to its quantity. A diamond, for example, is rare because so few are in circulation. The same is true with currency: when many dollars circulate throughout the economy, the currency depreciates. An increase in the money supply occurs when the US prints more money or the Federal Reserve lowers interest rates. When interest rates are lowered, more people take out loans and the issued money increases the amount of money in circulation. If too much money is in circulation, the economy runs the risk of hyperinflation. Harvard economist and professor Greg Mankiw explains Zimbabwe was a country that experienced a rapid increase in prices due to inflation, but curtailed its rapid monetary expansion by tying its currency to the U.S. dollar.
Selling Currency
Investors, financial institutions and central banks often purchase foreign currency. Foreign governments hold large reserves of foreign currency as a safeguard and as an investment. For instance, the "Wall Street Journal" reports that China owns 2.4 trillion U.S. dollars as means of steadying the country's local currency, the yuan. When countries or investors grow wary of a currency's stability, they often sell their reserves into the open market. Concern arises when a country is deep in debt, is experiencing economic hardship or endures a terrorist attack or natural disaster. Releasing a glut of any currency on the market causes depreciation.
International Trade
Countries intentionally depreciate the value of their currency for reasons of international trade. When a nation's currency is weak its exports grow more enticing. For example, euros were sold en masse during the Grecian debt crisis, which in turn caused a weakening or devaluation of the euro. However, currency depreciation is not always bad: The Wall Street Journal explains a 10 percent euro devaluation could provide a 17 percent increase in the euro zone's gross domestic product. Export-heavy countries are typically able to sell more goods when they are cheaper for other nations to purchase. Several countries, such as the United States, accuse China of keeping the yuan artificially devalued in order to sell more exports at the economic expense of countries with strong currencies.
