A situation that arises when US dollar’s value is appreciating relative to a specific foreign currency or a basket of foreign currencies. In other words, a strong dollar means that a US dollar is exchanged for larger amounts of a foreign currency. For example, if the EUR/USD exchange rate has fallen from 1.3345 to 1.2564, then the dollar is said to be strengthened because its price in terms of the euro has increased. A fall in the EUR/USD is an appreciation of the dollar relative to the euro and an depreciation of the euro against the dollar.

To calculate the amount of appreciation, the following formula is used:

Dollar appreciation = (dollar value at time T – dollar value at time T-N)/ dollar value at time T

Where: N < T.

Dollar appreciation = (1.3345 – 1.2564) ÷ 1.3345 = 0.0585 = 5.85%

Therefore, the dollar has strengthened by 5.85% against the euro. This implies that one dollar would purchase a larger amount of euro than before. The dollar may gain value against other currencies due to changes in the interest rate and outlook on the US economy.