What is depreciation?
Currency depreciation is a fall in a currency's value against another currency or a basket of currencies, so each unit buys less foreign money than before.
In formal terms, depreciation is a market-driven decline in a currency's exchange rate under a floating or managed-floating regime. It is always measured against something: the rupee can depreciate against the US dollar and appreciate against another currency at the same time.
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Worked example: rupee depreciation
This is a hypothetical case with no real rates.
- Last month, one US dollar cost a certain amount of rupees.
- This month, the same dollar costs more rupees.
- The USD/PKR rate has risen, so the rupee has depreciated against the dollar.
What this means in practice:
- An importer paying a fixed dollar invoice now needs more rupees.
- A worker abroad sending a fixed dollar amount home delivers more rupees.
- Someone holding rupee savings can buy fewer dollar-priced goods.
Edge case on percentages: the percentage rise in USD/PKR is not the same as the percentage fall of the rupee. The two figures are measured from different starting points, and the rupee's percentage loss is always the smaller one. Check which side a news report or chart is quoting.
Depreciation vs devaluation
| Depreciation | Devaluation | |
|---|---|---|
| Cause | Market supply and demand | Official decision by the authority |
| Regime | Floating or managed float | Fixed or pegged rate |
| Opposite | Appreciation | Revaluation |
News often uses the two words as if they meant the same thing. Where a central bank manages the rate closely, for example under a crawling peg, the line between them blurs.
Do not confuse either word with depreciation in accounting, which is the gradual write-down of a physical asset's book value over its useful life. That term has nothing to do with exchange rates.
Where the term appears
- Trading platforms: on a chart of USD/PKR or any pair with the rupee as the quote currency, a rising line means the rupee is depreciating. In a pair such as EUR/USD, a falling line means the euro (the base currency) is depreciating against the dollar. See currency pairs.
- Central bank reports: monetary policy statements discuss the exchange rate next to inflation and interest rates. The official rupee reference rates are published on the State Bank of Pakistan website.
- News: headlines such as "rupee slides" or "rupee hits record low" describe depreciation. These events are part of fundamental analysis.
- Your own account: if your account currency differs from the currency you spend, depreciation changes the value of your balance in rupee terms. This is currency risk.
Exchange rates can move sharply after policy news. Leveraged forex and CFD trading on such moves can lose money fast, including more than you expected.
Related terms
- Currency appreciation
- Devaluation and revaluation
- Crawling peg
- Currency board
- Dollarization
- Emerging markets
- Basis point
- Trading glossary
Frequent questions
What does rupee depreciation mean in simple words?
It means you need more rupees to buy the same amount of a foreign currency, such as the US dollar.
Is depreciation the same as devaluation?
No. Depreciation comes from market forces. Devaluation is an official decision to lower a fixed or pegged rate.
How do I see depreciation on a chart?
When the currency is the quote currency (as the rupee is in USD/PKR), a rising chart shows it depreciating. When it is the base currency, a falling chart shows it depreciating.
Does depreciation always cause inflation?
It often raises the rupee price of imports, which can feed into inflation. How much depends on many other factors, so there is no fixed rule.
Can a currency depreciate against one currency and rise against another?
Yes. Exchange rates are pairwise, so the result depends on which currency you compare it with.