What is currency devaluation?

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Currency devaluation refers to a decline in the value of a national currency vis-à-vis other currencies. The effect is to make a country's exports less expensive and its imports more expensive.

History

In the past, money was either made of a fixed amount of gold or silver or, in the case of paper money, redeemable for a fixed amount of precious metal. Devaluation occurred when the fixed amount of gold or silver was lowered.

Floating vs.Ffixed Exchange Rates

Nowadays, nations have either a fixed exchange rate, when they peg the value of their currency to a specific asset (usually another currency), or a floating exchange rate, when they allow their currency to be freely convertible in currency markets.

Currency Markets

The currency market conducted among banks internationally sets the exchange rate for free-floating currencies, such as the U.S. dollar, the euro and other major currencies.

Method of Devaluation

A country with a fixed exchange rate regime can devalue its currency by changing the peg, simply declaring its currency now to be worth less. For a floating currency, the value will increase or decrease depending on interest rates, trade and payments imbalances and other factors.

Politics of Devaluation

Countries sometimes devalue their currencies to increase exports. China has been criticized for keeping its exchange rate too low with respect to its economic growth, effectively devaluing it by not increasing it appropriately.

Source:

Federal Reserve

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What is currency devaluation?

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