Currency Value

The value of a currency is always given in terms of another currency. For example, the value of a US dollar in terms of British pounds is the £/$ exchange rate, and the value of the Japanese yen in terms of dollar is the $/¥ exchange rate. Understanding this procedure is particularly useful when dealing with unusual currencies.

The value of a particular currency is fluid, meaning it is constantly susceptible to change. This is due to appreciation and depreciation.

Currency appreciation is when a currency's value rises in terms of the other. For example, the dollar appreciates in regard to the euro if the €/$ exchange rate rises.

Currency depreciation is when the value of a currency falls in terms of the other. For example, the dollar depreciates with respect to the euro if the €/$ exchange rate falls.

Note that if the €/$ rate rises, then its reciprocal, the $/€ rate falls. Since the $/€ rate represents the value of the euro in terms of dollars, this means that when the dollar appreciates with respect to the euro, the euro must depreciate with respect to the dollar.

The rate of appreciation (or depreciation) is the percentage change in the value of a currency over some period of time.

Example #1:
On Jan. 8 1997, E¥/$ = 116
On Jan. 8 1996, E¥/$ = 105
Use percentage change formula: (New value - Old value)/Old Value
(116-105)/105 = 11/105 = 0.105
Multiply by 100 to write as a percentage to get:
0.105 x 100 = +10.5%
Since the change in the value of the $ has been calculated in terms of yen, and since the percentage change is positive, this means that the dollar has appreciated by 10.5% in regard to the yen during the course of a year.

Example #2:
On Jan. 8 1997, E£/$ = 0.59
On Jan. 8 1996, E£/$ = 0.65
Use percentage change formula: (New value - Old value)/Old Value
(0.59-0.65)/0.65 = - 0.06/0.65 = - 0.092 Multiply by 100 to write as a percentage to get:
-0.092 x 100 = -9.2%
Since the change in the value of the $ has been calculated in terms of pounds, and since the percentage change is negative, this means that the dollar has depreciated by 9.2% in the regards to the pound during the course of the year.