Currency devaluation is a deliberate downward adjustment of the value of a country’s currency against another currency.
After devaluations, the same amount of a foreign currency buys greater quantities of the country’s currency than before the devaluation.
This means that the country’s products and services are likely to be sold at lower prices in foreign markets, making them more competitive.
Devaluation usually takes place when a government notices regular capital outflows (or capital flight) from a country, or if there is a significant trade deficit (where the total value of imports outweighs the total value of exports).
For example, in 2015, the People’s Bank of China (PBOC) devalued its currency by changing the market mechanism for fixing the yuan against the dollar. This made the yuan weaker and Chinese exports cheaper.
Due to this devaluation, there were fears around the world that other governments might seek to protect their export markets and also devalue their currencies, possibly starting a currency war.
Currency Devaluation vs. Currency Depreciation
Devaluation is a deliberate action and should not be confused with currency depreciation, which is a fall in a currency’s value as a result of non-governmental activities.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.