Eli5 what causes a currency to lose value?
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Are you talking about buying power or inflation — like the same amount of money doesn’t buy as much any more?
Or are you talking about currency exchange rates? Like the value of the dollar in relation to the euro or the pound or the yen goes down.
The latter is just supply and demand. If more people are converting from dollars to euros than from euros to dollars then the exchange rate goes down. A trade deficit can cause that but also other ways of flowing money like buying foreign bonds, etc.
Basically it comes down to supply and demand. As the supply goes up (more money is minted), the dollar that you have is now worth less as there are more total dollars. This happens as the government prints more money which is known as inflation.
If one currency is experiencing significant inflation compared to another, then the relative values of each country’s currency will also be affected.
In a global context, exchange rates are based on several factors but most simply its based on supply and demand as well. If you think of the US Dollar as apples and the Euro as oranges and everyone is tired of apples and they want oranges (immigration to Europe/business in the EU as a few real world examples) then the trade rate might go from 1 apple = 1 orange to 2 apples = 1 orange.
Supply and demand. One of the things that make something valuable is how rare it is. This applies to baseball cards, Pokémon, or vintage cars. It also applies to currency. If a central bank creates more money than is needed the value of that currency goes down. If it creates less than the value of money goes up.
Foreign trade can create more demand for a currency as well as demand for the currency as an investment.
Say there are 100 seashells in the world. You have 10 of them. You own 10% of the seashell supply
Then 900 more seashells wash up on shore. Your seashell collection did not change, but now you only have 1% of the seashell supply. You have the exact same amount of seashells but they are now worth 1/10th of what they were
That’s inflation, which is how currency loses value. When you put more dollars into the system, it makes every other dollar worth less. The inflation we are seeing now is due to politicians dumping literally trillions of dollars into the US economy.
Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.
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