Currency devaluation is a monetary policy tool used by governments to deliberately reduce the value of a country’s currency in relation to another currency, group of currencies, or standard.
Currency devaluation is a deliberate downward adjustment of the value of a country’s currency against another currency.
Devaluation is a tool used by monetary authorities to improve the country’s trade balance by boosting exports at moments when the trade deficit may become a problem for the economy.
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).
Governments can use this when their country has a fixed exchange rate or a semi-fixed exchange rate. Governments devalue their currencies to improve their trading position in the world.
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.