Every country adopts policies intended to manage its currency and contain inflation. In international trade, a nation’s currency value relative to others can make purchases and sales more or less costly, with meaningful consequences for its economy. This article provides an overview of common circumstances that can lead a country to devalue its currency.
What Does Currency Devaluation Mean?
Currency devaluation is a relatively simple concept: it is a country’s deliberate decision to reduce the value of its money compared with other currencies. Carrying it out is more complicated. A central bank typically sells a substantial quantity of its own currency in foreign-exchange markets, increasing supply. Without a matching rise in demand for that currency, its value declines in the global marketplace.
How Devaluation Affects an Economy
When a country’s currency loses value against the currencies of other nations, foreign goods and domestic products made with imported materials cost more for its residents. Prices may remain comparatively stable, however, for service industries and for products produced using locally sourced materials.
Why Might a Country Devalue Its Currency?
Central banks may use devaluation to respond to a trade imbalance with another nation. As explained earlier, devaluation raises the cost of imports for a country’s residents. That can encourage domestic purchases while making the country’s exports less expensive for overseas consumers. Both effects can help local manufacturers and workers sell more goods at home and in foreign markets. Devaluation may cause friction between nations when it is viewed as obvious market manipulation. The United States and other countries have accused China of keeping the yuan artificially low through repeated devaluations during the preceding decade. Politicians and others often use the term “currency manipulator” for countries they believe intentionally devalue currency to strengthen their export position in world trade.
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