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The market for a currency typically has the y axis labelled as (currency1/currency2) where currency1 is the currency in which the demand and supply is for. If this is the case, wouldn't it mean that a vertical movement upwards along the vertical axis mean that the currency is in fact depreciating rather than appreciating? For example, if a point on vertical axis is originally at £3/1USD and a movement upwards along the vertical axis to a point where £5/1USD, does this not mean that the pound has depreciated? I'm curious all of a sudden because I've always been told and analysed the currency market as one where any upwards/downwards movement on the vertical axis represents appreciation/depreciation, but the example I've just given seems to conflict with this. I've also found various sources where a movement upwards along the vertical axis shows an appreciation, such as in the pic below, which is how I've always viewed the market until just now.

enter image description here

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The convention in finance is that any currency pair "currency1/currency2" is to be interpreted as the number of units of currency2 needed to buy one unit of currency1, or alternatively, as the number of currency2 you get from selling one unit of currency1.

For instance, as of 13th of Match of 2017, the currency pair rate of exchange between the £ and the US $ (GBP/USD) was roughly 1.22. This means that you need 1.22 US dollars to buy £1.

Under this convention, a fall/increase in the GBP/USD means a depreciation/appreciation of the British Pound with respect to the US Dollar.

So, using your example, if the GBP/USD goes up from 3 to 5, then the British Pound appreciates with respect to the US Dollar.

By contrast, the convention in economics is to define the exchange rate as £x/\$1, meaning that you need x British Pounds to buy 1 US Dollar, or that you can sell 1 US Dollar for x British Pounds.

Under this convention, an increase/fall in £x/\$1 means a depreciation/appreciation of the British Pound with respect to the US Dollar.

In other words, the interpretation is exactly the opposite.

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  • $\begingroup$ As the graphs I refer to in general are being used in economics analysis, does that mean that the second part of your answer supports my suspicion that perhaps the diagram I've provided as an example was incorrectly interpreted by the author? (the diagram is from economicsonline.co.uk) $\endgroup$ – user98937 Mar 15 '17 at 15:08
  • $\begingroup$ An increase in £x/\$1 means a depreciation of the pound vis-a-vis the dollar, as you need more pounds to buy one dollar. This could be understood as a "push up" or an"increase" in the exchange rate. But the use of "exchange rate" without context is ambiguous, as the exchange rate can always be defined in two ways. $\endgroup$ – luchonacho Mar 15 '17 at 16:41
  • $\begingroup$ I've only come across the term "appreciation" of a currency in my economics reading, meaning a currency is worth more than it used to with respect to the same unchanged unit of another currency. I don't often see the terms "Increase" or "push-up" used in economic context. With this in mind, could you/anyone answer the first comment that I made under luchonacho's answer $\endgroup$ – user98937 Mar 16 '17 at 14:04
  • $\begingroup$ Why is the interpretation incorrect? It is showing an increase in the exchange rate. The author has not spoken about an appreciation or depreciation (at least not in the graph you show). The term depreciation is very common too. Here is an example. $\endgroup$ – luchonacho Mar 17 '17 at 9:50

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