What Is Peso Depreciation?

by Alan Li; Updated September 26, 2017
Currency depreciation means that the currency has become less valuable.

Currencies are not equal to one another in their value and thus purchasing power. Mos,t but not all currencies, can and do experience changes in their values compared to other currencies, this being called appreciation when their value increases and depreciation when their value decreases. Peso depreciation means that one of the currencies called pesos -- which is the currency in several former Spanish colonies, including Mexico -- have decreased in value compared to one or more circulating currencies.

Fixed Exchange Rate

Currencies that bear fixed exchange rates do not see changes in their official value except at the issuing nation's explicit decision. For example, China had its currency set at 8.27 yuan to one U.S. dollar before 2005. Nations can control and maintain their exchange rate policies either through official decree or through manipulating demand and supply on the money market.

Floating Exchange Rate

Floating exchange rates mean that currencies can have their values changed through the economic processes of supply and demand on the money market. Most nations use what is called a dirty float system, meaning that they will intervene on the money market if the consequence is otherwise disaster. Almost no nation uses a pure floating exchange rate system.

Demand

Demand works on the value of currencies in much the same way as it does on goods and services. All things being the same, the value of a currency rises when demand for it rises and falls when demand for it falls. Peso depreciation could have come about as a result of less people wanting to hold onto the currency.

Supply

Changing supplies of currencies work in the same manner on their values as it does on goods and services. Having more of the currency available on the money market results in its value falling while having less results in its value increasing. Governments can manipulate the supply of their currencies through buying and selling government bonds. A peso depreciation could have come about as a result of more pesos flooding the market.

About the Author

Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.

Photo Credits

  • euro coins on top of euro banknotes image by Stefan Ataman from Fotolia.com