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Currency Appreciation and Depreciation Current and Financial Account Surpluses and Deficits Current account deficits (or

surpluses) and financial deficits (or surpluses) do not directly affect an economy. In fact, these deficits (surpluses) are actually the result of what is occurring in an economy, instead of being the cause. Trade deficits often occur when a nation's economy is growing faster than the economies of its trading partners. Rapid domestic growth increases the demand for imports, while slow or no growth with foreign economies can cause a decline in demand for the country's exports. Trade balances are also affected by capital flows. If a nation's economy offers investment opportunities that are relatively better than other nations, then capital will flow into the country. With flexible exchange rates, this capital inflow will tend to increase the value of the nation's currency.

Facts points
Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears interchangeably with devaluation. Its opposite, an increase of value of a currency, is currency appreciation. The appreciation of a country's currency refers to an increase in the value of that country's currency. Continuing with the CAD/EUR example, if the Canadian dollar appreciates relative to the euro, the exchange rate falls - it takes fewer Canadian dollars to purchase 1 euro (1 EUR=1.5CAD 1 EUR=1.4CAD). When the Canadian dollar appreciates relative to the Euro, the Canadian dollar becomes less competitive. This will lead to larger imports of European goods and services, and lower exports of Canadian goods and services. The depreciation of a country's currency refers to a decrease in the value of that country's currency. For instance, if the Canadian dollar depreciates relative to the euro, the exchange rate (the Canadian dollar price of euros) rises - it takes more Canadian dollars to purchase 1 euro (1 EUR=1.5CAD 1 EUR=1.7CAD). When the Canadian dollar depreciates relative to the Euro, the Canadian dollar becomes more competitive because the price of Canadian goods when exchanged to Euro will be cheaper leading to a larger Canadian export. On the other hand, European countries that denominate its goods and services in Euros will have lost competitiveness to the Canadian dollar. The price of European products denominated in Euros will thus become more expensive in Canada.

Currency Appreciation or Depreciation in Bangladeshi context Factors that can cause a nation's currency to appreciate or depreciate include: Relative Product Prices - If Bangladeshi goods are relatively cheap, foreigners will want to buy those goods. In order to buy those goods, they will need to buy the nation's currency. Countries with the lowest price levels will tend to have the strongest currencies (those currencies will be appreciating). Monetary Policy - Countries with expansionary (easy) monetary policies will be increasing the supply of

their currencies, which will cause the currency to depreciate. Those countries with restrictive (hard) monetary policies will be decreasing the supply of their currency and the currency should appreciate. Note that exchange rates involve the currencies of two countries. If a nation's central bank is pursuing an expansionary monetary policy while its trading partners are pursuing monetary policies that are even more expansionary, the currency of that nation is expected to appreciate relative to the currencies of its trading partners. Inflation Rate Differences - Inflation (deflation) is associated with currency depreciation (appreciation). Suppose the price level increases by 40% in the Bangladesh, while the price levels of its trading partners remain relatively stable. Bangladeshi goods will seem very expensive to foreigners, while Bangladeshi citizens will increase their purchase of relatively cheap foreign goods. The Bangladeshi taka will depreciate as a result. If the Bangladeshi inflation rate is lower than that of its trading partners, the Bangladeshi taka is expected to appreciate. Note that exchange rate adjustments permit nations with relatively high inflation rates to maintain trade relations with countries that have low inflation rates. Inflation Increase Import Increase supply of BDT in foreign exchange market Taka Depreciated Inflation Decrease export Decrease demand of BDT in foreign exchange market Taka Depreciated

Income Changes - Suppose that the income of a major trading partner with the Bangladesh, such as Great Britain, greatly increases. Greater domestic income is associated with an increased consumption of imported goods. As British consumers purchase more Bangladesh goods, the quantity of Bangladeshi taka demanded will exceed the quantity supplied and the Bangladeshi taka will appreciate.

Appreciation

Depreciation

Decrease Export

Increase Import

Increase

Export

Decrease Import

Negative BOP & BOT


Decrease FOREX Reserve

Positive BOP & BOT Increase FOREX Reserve

Here these are the theoretical possible events may occur during appreciation or depreciation in the Bangladesh economy. But real scenario will be little bit different due to some facts. Here are the facts for whom scenarios are varies, If depreciation occur then exact positive impact is not occur because of, 1. 2. 3. 4. 5. Bangladeshi market is a market of snob goods. Semi luxury product demand not changer or increase This market have extra value for foreign goods Luxury product demand decrease very little Remittance not change actually appreciation

But due to currency appreciation we can get few benefits and problem, what are not run with regular trends. 1. Necessary goods can be buy cheaply 2. Appreciations actually destroy our local market and its production growth.