Depreciation (Currency)
Plain definition
A decrease in the value of a currency relative to another currency under a floating exchange rate -- the domestic currency buys less foreign currency than before. Depreciation is market-driven; the equivalent policy action under a fixed rate is called devaluation.
In economics
Depreciation makes exports cheaper abroad and imports dearer at home, which tends to improve the trade balance but raises imported inflation. Depreciation often follows trade deficits, capital flight, or interest-rate cuts that push investors toward higher-yielding currencies.
Example
If the pound slides from 1.30 to 1.20 dollars per pound, the pound has depreciated: British exports get cheaper for Americans while imported goods cost Britons more.
Do not confuse currency depreciation with capital depreciation. Currency depreciation is a fall in a currency's foreign-exchange value; capital depreciation is the wear and tear of physical assets like machinery -- entirely different concepts that happen to share a word.