Question

The U.S. dollar exchange rate increased from \(\$ 0.96\) Canadian in June 2011 to \(\$ 1.03\) Canadian in June \(2012,\) and it decreased from 81 Japanese yen in June 2011 to 78 yen in June 2012. Did the U.S. dollar appreciate or depreciate against the Canadian dollar? Did the U.S. dollar appreciate or depreciate against the yen?

Short answer

The U.S. dollar appreciated against the Canadian dollar and depreciated against the Japanese yen.

Step-by-step solution

- Understand Currency Appreciation and Depreciation

Currency appreciation occurs when one currency becomes stronger compared to another currency, meaning you can buy more of the other currency with the same amount of the stronger currency. Conversely, depreciation occurs when a currency becomes weaker, meaning you can buy less of the other currency.

- Calculate USD to Canadian Dollar Changes

Compare the exchange rates from June 2011 and June 2012. In June 2011, 1 USD could buy 0.96 CAD. In June 2012, 1 USD could buy 1.03 CAD. Since 1 USD can buy more CAD in 2012 than in 2011, the USD has appreciated against the Canadian dollar.

- Calculate USD to Yen Changes

Compare the exchange rates from June 2011 and June 2012. In June 2011, 1 USD could buy 81 JPY. In June 2012, 1 USD could buy 78 JPY. Since 1 USD can buy fewer JPY in 2012 than in 2011, the USD has depreciated against the yen.

Key concepts

Currency Appreciation

Currency appreciation happens when one currency strengthens relative to another. This means you can get more of the other currency for the same amount of the stronger currency. For example, if the exchange rate of USD to CAD increases from 0.96 to 1.03, it means the USD has appreciated. It's now stronger than before, allowing people to get more Canadian dollars for the same US dollar. Appreciation generally indicates a more robust economy or increased investor confidence in that currency.

Currency Depreciation

Currency depreciation is the opposite of appreciation. It happens when a currency weakens compared to another currency, meaning it buys less of the other currency. For instance, if the USD to JPY exchange rate falls from 81 to 78, the USD has depreciated. It has become weaker, so you get fewer yen for the same US dollar. Depreciation can occur due to various factors like political instability, economic downturns, or lower interest rates.

Foreign Exchange Market

The foreign exchange market, or Forex, is where currencies are traded. It's the largest financial market globally, with trillions of dollars exchanged daily. The Forex market operates 24/7, allowing for continuous currency trading. Major players include central banks, financial institutions, corporations, and individual traders. Exchange rates fluctuate based on supply and demand, influenced by economic indicators, interest rates, and geopolitical events.

USD to CAD

The exchange rate between the US dollar (USD) and the Canadian dollar (CAD) is vital for trade and travel between the United States and Canada. For instance, if the rate goes from 0.96 to 1.03, it means that one US dollar can now buy more Canadian dollars. This change signifies that the USD has appreciated against the CAD during that period. This can impact various sectors like tourism and imports/exports, making US goods more expensive for Canadians and vice versa.

USD to JPY

The USD to JPY exchange rate is crucial for economic relations between the United States and Japan. If the rate decreases from 81 to 78, it indicates that the USD has depreciated against the Japanese yen. This implies a weaker USD, buying fewer yen, which can affect trade. American products might become cheaper in Japan, boosting exports, but Japanese imports might become more expensive for US consumers. Movement in these rates is closely watched by investors and policymakers alike.