Currency appreciation is the increase in value for one currency against a separate currency or other contrasting value. Currencies appreciate due to many factors with various effects on different kinds of investments. Investors often consider the possibilities of currency appreciation as just one factor in a complex portfolio strategy.
One basic type of currency appreciation is when a single currency gains value relative to another currency. Investors sometimes refer to this as “currency pair” trading, where the “base” currency is the currency that the investor hopes to appreciate against the second, or “counter” currency. Simple currency pair trading can allow for significant gains when currency values are fairly volatile.
In addition to trading with currency pairs, currency appreciation is also a factor in many different kinds of foreign exchange or Forex investing. With today’s globalized Forex system, many investors are taking advantage of modern technology to place trades related a range of global economies, currencies, commodities, and financial products. Currency appreciation can affect any of these.
One way that professionals explain the broader impact of currency appreciation is that significant currency appreciation can change the values of different financial products because it is changing an underlying value, where the currency value is a foundation for many derivative values.
In a greater analysis of currency appreciation, analysts may look at how fluctuating currency prices demonstrate either economic realities, foreign policy objectives, or both. Some countries stand to gain by making their currencies weak or strong in terms of valuation. In other cases, currency fluctuations may be out of the control of a regional government due to phenomena such as inflation. Experts often try to define the causality or contributing factors to situations where the appreciation of currency happens rapidly.
In modern times, financial organizations have come up with some ways to accommodate more sophisticated currency trading. One of these is called cross currency trading, where an investor can exchange any one type of money for any other kind of currency. Prior to cross trading, individuals around the world who wanted to convert currencies needed to first convert the base currency into U.S. dollars, then convert the resulting money into another world currency. Cross currency methods allow for avoiding the unnecessary second conversion.