Final answer:
Currency appreciation occurs when its exchange rate rises relative to other currencies, making it stronger. A depreciation occurs when the exchange rate falls, making the currency weaker. The phenomenon is affected by investor expectations and can be self-reinforcing.
Step-by-step explanation:
To determine if your currency has appreciated or depreciated over time, you need to look at its exchange rate relative to other currencies. When the exchange rate for a currency rises, so that it exchanges for more of other currencies, it is said to have appreciated or become stronger. Conversely, if the exchange rate falls, and the currency trades for less of other currencies, it has depreciated or become weaker. For example, if the value of the U.S. dollar increases, U.S. importers may find that foreign goods are less expensive, encouraging more imports. But if the dollar's value decreases, U.S. exports become more competitively priced in foreign markets, potentially increasing sales abroad.
Investors' expectations can greatly influence exchange rates. If they expect a currency to strengthen in the future, they may buy more of that currency now, leading to immediate appreciation. Conversely, expectations of a weakening currency can trigger a sell-off, leading to depreciation. These shifts in valuation can be self-reinforcing due to the speculative nature of currency trading.