The depreciation of a currency generally means that the value of that currency declines with respect to its major trading partners. For example if one British pound exchanges for 1.5 U.S dollars then when one British pound exchanges for 2 dollars then we conclude that the dollar has depreciated against the British pound.
In the case ofAmericathe dollar has been declining against other major currencies for a long time now.
Many scholars and researchers have come up with many suggestions as to why the U.S dollar has been depreciating. Among these reasons put forward include the following:
- The rate of inflation within theunited stateseconomy
Economically we can define inflation as the rate at which the general price levels of goods and services within an economy rises, while at the same time the purchasing power of the currency falls. This means that if a unit of one currency can by a certain basket of goods, as the prices of goods goes up the same unit of the currency will buy less of the basket of goods. In most cases central banks try to maintain an inflation of not more than 3%.