But most exchange rates aren’t fixed—they’re “floating,” meaning their values constantly change depending on various economic factors. As of 2019, one U.S. dollar is the equivalent of sixty-eight Indian rupees. Ten years ago, a dollar was worth fifty rupees. And forty years ago, you only needed eight rupees to get one dollar. Over time, the value of the rupee has depreciated, or gone down, making it worth less. Sometimes a currency that depreciates is described as getting weaker because you can buy less foreign currency with it. On the flip side, the Israeli new shekel was worth just nineteen U.S. cents in 2003, but its value has grown over time, trading in for twenty-eight cents in 2019, a 50 percent increase. Over this time period, the shekel got stronger or more valuable; in other words, the currency appreciated.
Appreciation = getting stronger = worth more = higher value
Depreciation = getting weaker = worth less = lower value
Changes in the value of a currency are influenced by supply and demand.
Currencies are bought and sold, just like other goods are. These transactions mainly take place in foreign exchange markets, marketplaces for trading currencies. Currencies increase in value when lots of people want to buy them (meaning there is high demand for those currencies), and they decrease in value when fewer people want to buy them (i.e., the demand is low). And if a large amount of a currency is lying around in the market (i.e., supply), its value will go down, just like its value would go up if there were not much of it in the market. As you will see below, supply and demand of a currency can change based on several factors, including a country’s attractiveness to investors, commodity prices, and inflation.