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Why Countries Devalue Their Currencies?
Written by: PaxForex analytics dept - Friday, 06 October 2017 0 comments
The average person would probably expect a country to want to increase its currency’s strength, so it could perform better with trade and buy more. However, for a variety of reasons, governments around the world intentionally make adjustments to their currencies, affecting its value versus other currencies. Countries devalue their currencies only when they have no other way to correct past economic mistakes - whether their own or mistakes committed by their predecessors.
Devaluation is a deliberate downward adjustment to the value of a country's currency relative to another currency, group of currencies or standard. Devaluation is a monetary policy tool used by countries that have a fixed exchange rate or semi-fixed exchange rate. It is often confused with depreciation, and is the opposite of revaluation.Devaluing a currency is decided by the government issuing the currency, and unlike depreciation, is not the result of non-governmental activities.
When a government devalues its currency, it is often because the interaction of market forces and policy decisions has made the currency's fixed exchange rate untenable. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all offers of its currency at the established exchange rate. When a country is
unable or unwilling to do so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange reserves.
The history of trade recalls many examples of intentional devaluation with the purpose of conquering new markets through the lower currency rates of the devalued currency. One of the biggest devaluation waves in history was in the 1930s when at least nine of the leading world economies devalued their national currencies, including Australia, France, Italy, Japan and the United States. During the Great Depression, all these nations decided to abandon the gold standard and to devalue their currencies by up to 40%, which helped revive their economies and stabilized currency rates.
Finally, a country may want to devalue its currency to pay off international debt. If its original loans were made in the same currency, the country could devalue the monetary value by printing more to then pay off the loan faster. This approach gets the borrower country out of the debt that may be pulling financial resources away and becoming a burden. Currency devaluation is only one tool of a number of ways countries manipulate their currencies in relation to other countries. However, in some circumstances, it can be a very powerful tool.