Appreciation (currency)

Under revaluation ( currency appreciation , Revaluation ) is defined as the increase in the nominal exchange rate of its own currency against foreign currencies in indirect quotation . The opposite is devaluation .

General

Revaluations and devaluations can only occur between different currencies. Within the euro zone there is a single currency, the euro , so that appreciation or depreciation is not possible. Nevertheless, there is an economic gap between the EU member states , but this is not visible in course differences. There are appreciations and depreciations, for example, between the euro zone and the US dollar or the British pound . Appreciation refers to both the tendency of the domestic currency to increase in exchange rate against foreign currencies as a result of market fluctuations, as well as the appreciation that is administratively brought about by economic policy considerations of a state or a central bank .

Within the framework of the exchange rate mechanism , the revaluation tends to lead to a relative reduction in the price of imports and a relative increase in the price of exports to restore international competitiveness and to equalize the balance of payments by reducing foreign exchange stocks in the revaluing state.

Revaluations and devaluations have only been known since the system of fixed currency parities , where currency rates were only allowed to fluctuate within a fixed exchange rate range. If the highest intervention point was reached by a foreign currency , this currency threatened to appreciate or the domestic currency to depreciate. The situation was reversed at the lower intervention point.

history

There were no revaluations or devaluations for pure gold currencies because the automatism of the gold currencies did not allow any change in the gold parity . In July 1944, the International Monetary Fund (IMF) created a system of fixed exchange rates for the first time , in which its members agreed on administratively fixed US $ currency parities and / or gold parities. The US $ currency parity indicated how many units of a foreign currency corresponded to one US dollar. The parities of the other currencies can be calculated using the gold parities and / or US $ parities. This created a system of fixed exchange rates between the member countries. This made gold a common measure of value for all currencies. In May 1949 the IMF set the first exchange rate parity at 3.33 DM = 1 US $; in September 1949 the IMF parity was already at 4.20 DM due to the devaluation of the DM. In March 1961 it fell due to the first revaluation of the DM to 4.00 DM, the second DM revaluation followed in October 1969 to DM 3.66, a third in December 1969 to DM 3.22.

In October 1968, the constant downward pressure on the US dollar made it necessary for the Deutsche Bundesbank to stop its foreign exchange market interventions . The previous heterogeneous economic development in the western industrialized countries made it impossible to stick to this system of fixed exchange rates because the central banks had to intervene more and more frequently. Strong export nations like Germany tended to be suspected of revaluation, countries with a negative trade balance like the USA were potentially at risk of devaluation. Fixed exchange rates were first eased on September 30, 1969. The internationally agreed adjustment of exchange rate parities in December 1971 ( Smithsonian Agreement ) and the dollar devaluation by 10% in February 1973 were attempts to save the parity system. In a televised address on August 15, 1971, US President Richard M. Nixon unilaterally denounced the IMF's Bretton Woods Agreement . On December 12, 1971 the gold parity was finally abolished, on 17/18. December 1971 an agreement was made on the reorganization of exchange rates through so-called central rates as part of the Smithsonian Agreement . It was a matter of increasing the bandwidths from ± 1% to ± 2.25%.

On March 19, 1973, the European Economic Community began jointly block floating against the US dollar, which replaced the previously applicable fixed exchange rates in favor of freely fluctuating exchange rates. In March 1979, the block floating was transferred to the European Monetary System (EMS). Since then, the parities with the highest and lowest rates have been set over the ECU by means of a currency basket. From March 1979, the core element of the EMS was a system of bilateral exchange rate parities between the members, which were based on the DM as the strongest currency. It was replaced in January 1999 by the introduction of the euro , which is characterized by fixed currency parities for the member currencies. These parities were set by the Finance Ministers on December 31, 1998 on the basis of the ECU parities.

Causes and consequences

An appreciation occurs on the foreign exchange market when the rate of the domestic currency increases against the other currencies. Reasons for this can be lower inflation rates or higher interest rates than with the trading partners, net inflow of foreign currencies through current account surpluses or foreign exchange market intervention by a central bank:

The upgrading causes a deterioration in international competitiveness:

• Domestically produced goods are relatively more expensive abroad, with elastic foreign demand there is an increase in imports .
• Goods produced abroad are relatively cheaper; if domestic demand is elastic , more foreign goods are bought, and under certain circumstances foreign goods are bought more than domestic goods; the volume of exports is tending to decline. The same amount of imported goods becomes relatively cheaper after an upgrade.

A revaluation is initially accepted by the population, because a typical side effect is an at least short-term improvement in the standard of living , because imports and foreign travel become relatively cheaper. An appreciation of one's own currency also leads to a real reduction in the value of foreign currency loans ; If the debt level in foreign currency is high , this can lead to an improvement in the debt ratios. Because debtors in the upgrading state have to raise less foreign currency for their debt servicing. Since an appreciation contributes to an increase in imports and at the same time exports decrease, unemployment can rise in the medium term . Falling exports then also lead to a drop in income for private households and a drop in profits for (export-oriented) companies , so that consumption and investment are falling.

The revaluation shifts the terms of trade and reduces the existing current account surpluses, since on the one hand more foreign currency has to be spent on the increased imports and on the other hand less foreign currency is generated by lower exports.

Hedging

Exporters and importers who invoice in a foreign currency can completely or partially eliminate their exchange rate risks through hedging transactions . If the exporter has a receivable in a foreign currency, an appreciation of the domestic currency or a depreciation of the foreign currency would result in bad debt losses. He sold foreign currency as a forward contract , whose due date is identical to the maturity of the export demand. The importer has a liability in foreign currency, so that a devaluation of the domestic currency or an appreciation of the foreign currency would mean an increase of his liability for him, because he has to raise more foreign currency. He buys the foreign currency as a forward transaction, the maturity of which is identical to the term of the import liability. If the expected revaluation falls within the period of the hedge, both are credited with the market value agreed before the revaluation and suffer no revaluation losses. Both currency forwards eliminate the exchange rate risks in the form of risk reduction . Both achieve an original hedge against appreciation losses if they conclude their export and import transactions in the domestic currency.

Individual evidence

1. ↑ Gerhard Müller / Josef Löffelholz, Bank-Lexikon: Concise dictionary for banking and savings banks , 1973, Sp. 23
2. ↑ Helmut Lipfert , Introduction to Monetary Policy , 1973, p. 121 f.
3. ^ Hauke ​​Rath, Wirtschaft, Geld und Börse in the newspaper , 2000, p. 273
4. ↑ Bernd Engel / Hans Herber, Economics for Studies and Banking Practice , 1983, p. 252
5. ^ Ernst Baltensperger / Werner Ehrlicher / Rudolf Richter, Problems of Monetary Policy , 1981, p. 9
6. ↑ Ricarda Kampmann / Johann Walter, Makroökonomie , 2010, p. 225
7. ↑ Olivier Blanchard / Gerhard Illing, Makroökonomie , 2009, p. 567
8. ^ Bernhard Winkler, The political economy of the European Monetary Union , in: Alan W. Cafruny / Patrick Peters, The Union and the World: The Political Economy of a Common European Foreign Policy , Kluwer Law International, 1998, p. 184
9. ↑ Ricarda Kampmann / Johann Walter, Makroökonomie , 2010, p. 225