Devaluation of Currency

The Currency devaluation is the deliberate reduction in the value of a country’s currency against another currency.

It is used by monetary authorities when they need to improve the country’s trade balance by increasing exports if and when the trade deficit becomes a problem for the economy.

The monetary authority then sets a lower exchange rate for the national currency in relation to a foreign reference currency or currency basket.

Why is a currency devaluated?

  • A national economy may decide to devalue their currency by its own will.
  • This is significantly different from depreciation as it is not linked to non-governmental activities or market factors.
  • One reason why a country may devalue its currency is to reduce the trade imbalance encountered in import-exports. Devaluing a currency reduces the cost of a country’s exports which makes them more competitive in the international market.
  • It also increases the cost of imports as now the domestic currency is worth-less so the domestic consumers are less inclined to purchase them which further strengthens the domestic businesses.
  • This causes the exports of a country to increase and imports to decrease which in turn favor an improved balance of payments by the reduction of trade deficits.

 

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