23 Nov 2022


Currency Depreciation of the U.S. Dollar

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Academic level: College

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Exchange rate depreciation is a situation where the value of a country’s domestic currency falls against the other. The major cause of currency depreciation is an unfavorable trade balance. Therefore, your choice of case scenario is perfect since America has been experiencing an unfavorable balance of trade against Mexico, a reality which has somehow contributed to the weakening of the US dollar. 

The idea of imposing taxes on the Mexican products in order to save the value of the US dollar against the peso to curb currency depreciation will be effective. That is because it will make Mexican goods to be more expensive than domestic products. For example, American motor industries import most of their steel and aluminum products from Mexico. So, in case the US imposes taxes on steel and aluminum from Mexico, the cost of these products will increase, thus discouraging American car manufacturers like ford from importing from Mexico. Consequently, the value of dollar will appreciate against the peso. 

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Currently, the exchange rate between the US dollar and the peso is 1USD=18.5185peso. So, if America increase tariffs on aluminum and steel by 25%, the price of these products will increase by the same percentage and the level of import of these products will also decrease by almost the same percentage. Eventually, there will be less demand on the dollar to import Mexican goods which will strengthen the value of the US dollar. 

Mathematically, in case the current cost of one ton of steel from Mexico is $100,000 when the exchange rate is 1USD=18.5185pesos, American car companies usually import 10 tons a month. But if America imposes 25% tax, the price per ton will increase to $125,000 and American car companies will now import 6 tons per month. Ultimately, the US dollar will strengthen and new exchange will be 1USD=21.5185pesos 

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StudyBounty. (2023, September 14). Currency Depreciation of the U.S. Dollar.


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