A situation that arises when US dollar’s value is depreciating relative to a specific foreign currency or a basket of foreign currencies. In other words, a weak dollar means that a US dollar is exchanged for smaller amounts of a foreign currency. For example, if the EUR/USD exchange rate has increased from 1.3345 to 1.4056, then the dollar is said to be weakened because its price in terms of the euro has decreased. An increase in the EUR/USD is a depreciation of the dollar relative to the euro and an appreciation of the euro against the dollar. To calculate the amount of depreciation, the following formula is used:
Dollar depreciation = (dollar value at time T – dollar value at time T-N)/ dollar value at time T
Where N < T.
Dollar depreciation = (1.3345 – 1.4056) ÷ 1.3345 = – 0.0533 = – 5.33%
Therefore, the dollar has weakened by 5.33% against the euro. This implies that one dollar would purchase a lower amount of euro than before. The dollar may lose value against other currencies due to changes in the interest rate and outlook on the US economy.
