[Anonymous]

Once again (try #3)….I find myself CLUELESS with exchange rates. Can someone please explain to me:

1. When it says the US dollar appreciates against the Euro, etc……what is happening?

2. Also, is the following $1=.75 euros to $1= .70 euros an appreciation or depreciation? <—confusing because it goes from .75 to .70 and I think it’s decreased/depreciated.

3. Can a test question read “the Euro appreciates against the dollar”? How would this be illustrated?

I have read ’til I’m blue in the face and just can’t grasp the overall concept. Please help!!!!

Thanks in advance!

[sunchopper]

OK so if the US dollar is appreciating against the Euro, it is gaining strength against the Euro. This means your US dollar can buy more Euros than before.

In your example, the US dollar is depreciating against he Euro. Think about it logically. Your US dollar was originally able to buy .75 Euros. It is now able to buy .70 Euros. This is less Euros than before. It is weaker against the Euro and has therefore depreciated in value.

Yes, you could have a question that says the Euro is appreciating against the US dollar. An example of this appreciation would be with an exchange rate on Jan. 1 where 1 Euro = 1.20 US dollars. Then on July 1, 1 Euro = 1.30 US dollars. In the case, the Euro was originally able to buy 1.20 US dollars and is now able to buy 1.30 US dollars. It is able to buy MORE US dollars than before and has therefore appreciated against he US dollar.

[khachik2003]

1. Appreciates means the US dollar is getting stronger relative to the euro. It would look something like this: $1.50 US= 1 euro to $1.45 US =1 euro or looking at it the other way, .70 euro= $1 US to .75 euro=$1. Basically it used to cost $1.50 to buy a single euro but it got cheaper and now it only costs $1.45 because the euro got weaker relative to the dollar. This will cause our exports to fall because countries that use the euro will find it more expensive to import our goods.

2. read #1. $1=.75 euro to $1= .70 euro means the US dollar has depreciated. Think of it like this. You go to the bank and pay $1 for .75 worth of euro. You take that money and buy a loaf of bread that costs .75 euros. A month passes and the rate is now $1= .70 euro. You pay your $1 and get back .70 euro now (a drop of 0.05). You can no longer buy that loaf of bread anymore because the us dollar depreciated and you're now getting less euros for your dollar. It works the other way around too. If the US dollar depreciates, countries that use the euro will import more of our stuff because their euro takes them farther than it did before.

3. It would read something like this. the US to euro exchange rates go from 1.50 to 1.25. What affect will this have?

a. US imports will fall

b. US imports will rise

c. demand for european goods will rise

d. demand will remain steady

hope that helps

[Taxi Cow Tent]

When you go to another country, you have to exchange your USD for their currency, in this case Euros.

Example: Cokes are $1 here every day and cokes are 1Euro every day in Europe. If you go over there, you can't pay with $1 (let's assume). So, you have to exchange dollars for Euros. One day, you might need $1.42 to buy 1Euro to buy your coke. The next day, if the dollar appreciates vs. the Euro, you will only need to exchange $1.40 (for example) for that 1Euro to buy your coke. You need less dollars to buy that same Euro b/c the dollar is more powerful/appreciated/worth more.

A currency APPRECIATES when it increases in value (i.e., it becomes more expensive, it purchases more foreign currency)

A currency DEPRECIATES when it decreases in value (i.e., it becomes cheaper, it purchases less foreign currency)

# 1 – the dollar will now buy more Euros (if it appreciates in your example)

# 2- the dollar depreciated there b/c you can now buy less Euros, b/c the dollar is worth less (depreciated) when compared to the Euro. This can also be stated that the Euro appreciated vs the Dollar.

# 3 – yes, your example # 2 is an example of this.

I think you may be getting confused b/c the formula can be written either way (either w/ the Euro or the Dollar on the left side of the equation).

Current rates:

1 euro = 1.4134 US dollars

1 US dollar = 0.7075 euros

Help any?

FAR - 11/10 - 84
REG - 2/11 - 89
BEC - 5/11 - 80
AUD - 5/11 - 83

[khachik2003]

yeah it can get confusing because the formula can be written either way and just because the number decreased, it doesn't necessarily mean that currency depreciated.

just ask yourself this question when you see the exchange rate: do I have to pay more to get that other currency or less?

if you used to pay $1.50 for one euro and now you have to pay only $1.25 for a euro, it's almost like a sale! 16% off 🙂 But it's not really a sale, you're just paying less for that euro because the dollar appreciated (got stronger)

if it looked like this $0.75 for a euro to $1.50 for a euro, that just means the dollar depreciated because it now costs you double just to get a single euro. It's like gasoline, it went from $2 for a gallon of gas to $4 a gallon. Your dollar does not take you as far as it did before because it got weaker

just look at it that way

[Anonymous]

Yes, it does.

A lot of my confusion is coming into play when it deals with export & imports. A good example would be in khachik2003 #3 question (above).

Correct me if I'm wrong……if one currency (dollar) appreciates, the other currency(Euro) is depreciating.

[khachik2003]

yes, that is one way of looking at it. Any time a currency goes up or down, it will have an inverse affect on the other currencies. You have to understand that this is all relative. If the dollar goes up, that does not mean that people who live in Europe and use the euro all of a sudden have to pay more for anything they buy in their own country. It just means that if they want to import US goods, it will now cost them more.

As far as its effect on imports and exports, just remember this:

if a country's currency appreciates, their exports go down

if a country's currency depreciates, their exports go up

it will always be an inverse relationship.

[Author]

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