What is the significance of currency devaluations to the home country

I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Global Players. Economy Economics. Table of Contents Expand. What Is Devaluation? Understanding Devaluation. Real-World Examples. Key Takeaways Devaluation is the deliberate downward adjustment of a country's currency value. The government issuing the currency decides to devalue a currency.

Devaluing a currency reduces the cost of a country's exports and can help shrink trade deficits. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

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Related Terms Manipulation Definition Manipulation is the artificial inflating or deflating of the price of a security or otherwise influencing the market's behavior for personal gain. Competitive Devaluation Competitive devaluation is a series of currency depreciations that nations resort to in tit-for-tat moves to gain an edge in international export markets.

What Is the Starbucks Index? The Starbucks Index is a measure of purchasing power parity comparing the cost of a tall latte in local currency against the U. Some countries and some groups of countries, however, continue to use fixed exchange rates to help to achieve economic goals, such as price stability. Under a fixed exchange rate system, only a decision by a country's government or monetary authority can alter the official value of the currency. Governments do, occasionally, take such measures, often in response to unusual market pressures.

Devaluation , the deliberate downward adjustment in the official exchange rate, reduces the currency's value; in contrast, a revaluation is an upward change in the currency's value. For example, suppose a government has set 10 units of its currency equal to one dollar. To devalue, it might announce that from now on 20 of its currency units will be equal to one dollar. This would make its currency half as expensive to Americans, and the U. To revalue, the government might change the rate from 10 units to one dollar to five units to one dollar; this would make the currency twice as expensive to Americans, and the dollar half as costly at home.

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.

A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation.

First, devaluation makes the country's exports relatively less expensive for foreigners. As most countries around the globe have some debt outstanding in one form or another, a race to the bottom currency war could be initiated. This tactic will also fail if the country in question holds a large number of foreign bonds since it will make those interest payments relatively more costly. Currency devaluations can be used by countries to achieve economic policy. Having a weaker currency relative to the rest of the world can help boost exports, shrink trade deficits and reduce the cost of interest payments on its outstanding government debts.

There are, however, some negative effects of devaluations. They create uncertainty in global markets that can cause asset markets to fall or spur recessions. Countries might be tempted to enter a tit for tat currency war, devaluing their own currency back and forth in a race to the bottom. This can be a very dangerous and vicious cycle leading to much more harm than good.

Devaluing a currency, however, does not always lead to its intended benefits. Brazil is a case in point. The Brazilian real has plunged substantially since , but the steep currency devaluation has been unable to offset other problems such as plunging crude oil and commodity prices, and a widening corruption scandal. As a result, the Brazilian economy has experienced sluggish growth. Monetary Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Markets News Trading News. News Markets News. Table of Contents Expand. Devaluing Currency.

To Boost Exports. To Shrink Trade Deficits. To Reduce Sovereign Debt Burdens. The Bottom Line. Key Takeaways Currency devaluation involves taking measures to strategically lower the purchasing power of a nation's own currency.

Countries may pursue such a strategy to gain a competitive edge in global trade and reduce sovereign debt burdens. Devaluation, however, can have unintended consequences that are self-defeating.