A country devaluates its currency when it wants to make its exports more competitive in global markets. It lowers the value of its currency relative to a chosen baseline, usually the US dollar. This reduces the amount of money that a country gets for each unit of its currency sold abroad, while also making imported goods more expensive domestically. This monetary policy tool is often controversial, especially in the case of China, which has been accused of using it to unfairly gain economic advantage over the United States.
Devaluation is most common in countries with fixed exchange rate systems, where government policies set the values of a country’s currency compared to other currencies. It’s less common in floating exchange rate systems, where market forces determine the value of a country’s currency.
Countries that suffer from persistent trade imbalances, where the value of imports exceeds the value of exports, might devalue their currencies in order to correct the imbalance. This makes exports cheaper in international markets while making imports more expensive for domestic consumers and businesses, thus favoring an improved balance of trade in the process.
Countries that are unable to keep up with their debt payments might also use devaluation to ease the burden of those payments. This strategy can be dangerous, as other countries may be incentivized to follow the same path and enter a tit-for-tat currency war, which can quickly spiral out of control and cause severe financial harm.
About the Author
