What is Devaluation?

Published by Thomas Herold in Economics, Trading

'Devaluation' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Devaluation involves an intentional adjustment to the downside for the currency value of a country. This is done in comparison to a currency standard, basket of currencies, or a single currency. This practice turns out to be a monetary policy tool for those nations that are either using semi fixed exchange or fixed exchange rates, like with China. Sometimes individuals confuse this tool with deprecation. The opposite of devaluation proves to be revaluation.

The government which issues the currency is the party that chooses to devalue it. Devaluations are always intentional, while depreciations instead result from activities beyond the scope of the government sector. A country has several motivations for devaluing its currency. The leaders might be attempting to fight against imbalances in their nation’s balance of trade.

By devaluating, they make the national exports more affordable which helps them to compete more effectively in the global market place. It also makes their country’s imports more costly for the citizens. This helps domestic consumers to choose to buy goods offered by their own domestic businesses. It strengthens the national economy.

It may seem like an appealing choice to devalue a currency. In reality, there are negative side effects to pursuing this option. When the leaders make the imports more costly, they protect their own native industry. These companies can then descend into inefficiency since they do not have much serious foreign competition any more. A greater number of exports as compared to imports also will increase the total demand. This often causes higher inflation at some point.

There are a number of different examples of official devaluations in the world. It may happen because of a variety of different reasons, yet government choices always lead to it. Egypt is a classic example. The country has long struggled with continuous strain from the black market demanding USD American dollars. This black market rose to prominence because of a shortage in foreign currencies that discouraged domestic and foreign investments in the Egyptian economy and also negatively impacted national businesses. The Egyptian government chose to put down the black market deals by devaluing their own Egyptian pound against the US Dollar by 14 percent back in March of 2016.

At first the Egyptian stock market delivered a favorable response after the currency devaluation. The black market reacted by depreciating the USD to Egyptian pound exchange rate. This caused the central bank to intervene. They were forced to announce a further devaluation of their currency again on July 12, 2016.

China also began to quietly devalue their currency throughout 2016. They did this in preparation for the U.S. presidential election results of November. Since both American candidates Donald Trump and Hillary Clinton were speaking out against the relationship with China, the country figured this would give them the opportunity to revalue their currency following the election in a move that would make it seem to be cooperating with the new administration. This makes the Chinese complicit in two rounds of currency devaluation, one to set up for the later intended opposite devaluing action.

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The term 'Devaluation' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.