A currency depreciates when it loses value against a foreign currency.
Currency depreciation refers to one currency's loss of value against another currency. In a floating exchange rate system, market fluctuations cause depreciation of a given currency, while devaluation occurs when governments lower the value of one currency in relation to another in a fixed exchange rate system.
Depreciation
Depreciation occurs when one currency goes down in value in relation to another currency. For example, the British pound depreciated against the U.S. dollar between 2005 and 2010. In December 2006, 1 pound cost 1.96 dollars but by March 2010, the pound had depreciated to 1.33 dollars.
Appreciation
Appreciation is the opposite of depreciation. Whenever one currency depreciates against a foreign currency, it can also be said that the foreign currency appreciates against the domestic. Hence, the U.S. dollar appreciated against the British pound between 2005 and 2010.
Floating Rates
Since 1971, exchange rates have been allowed to "float", which means that markets made up of hundreds of thousands of buyers and sellers from around the world determine the price of different currencies. Depreciation occurs when the demand for a certain currency decreases or the supply of that currency increases while demand stays constant.
Reference Currencies
Data stating that a currency is depreciating usually use reference currencies--currencies that are traded widely such as the dollar, the euro, the yen, and the pound. For example, if the Canadian dollar is depreciating, commentators say that it is depreciating against the U.S. dollar, and compare that rate to the euro; they will not use currencies such as the Guatemalan quetzal or the Thai baht.
Devaluation
Whereas depreciation is a decline in a currency's value due to market forces, devaluation is a decline in a value due to government intervention. Devaluation happens in a fixed exchange rate system (governments set exchange rates).
