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.
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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Monetary Policy Quantitative Easing vs. Currency Manipulation. Partner Links. Devaluation is the deliberate downward adjustment to the value of a country's currency relative to another currency, group of currencies, or standard. First, devaluation makes the country's exports relatively less expensive for foreigners.
Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current account deficit. There are other policy issues that might lead a country to change its fixed exchange rate. For example, rather than implementing unpopular fiscal spending policies, a government might try to use devaluation to boost aggregate demand in the economy in an effort to fight unemployment.
Revaluation, which makes a currency more expensive, might be undertaken in an effort to reduce a current account surplus, where exports exceed imports, or to attempt to contain inflationary pressures. Effects of Devaluation A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.
Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. But if the dollar is devalued, so by definition are investment returns devalued. Investment is what enables greater productivity among those who comprise any economy, but if policy favors devaluation, investment becomes less enticing.
Translated, investors hedge against inflation, which is currency devaluation. Wealth that already exists is more of a sure thing than claims on what might eventually amount to wealth.
Looked at in terms of the dollar and gold, the dollar has always merely been a measure of wealth facilitating the exchange of the goods, services and labor that represent real wealth. Translated, wealth that already exists does best during periods of devaluation. Think the s. Why risk stretching for uncertain returns if, assuming you get them, they come back in dollars exchangeable for fewer and fewer goods, services, and labor?
Fast forward to the present, Donald Trump has made plain since before he was president that he wanted a weaker dollar. Currency markets have complied over time. Its value has slowly declined ever since. People have been consuming wealth that already exists in slowly higher amounts over investment in the creation of future wealth. This is the definition of slower growth. Congress U. Presidency U. All Rights Reserved.
Dollar Depreciation and Devaluation. Report Outline The Gold Reserve Act of Depreciation of the Dollar in Foreign Exchange Depreciation of the Dollar in the United States Effects of Depreciation and Devaluation Special Focus The Gold Reserve Act of By the terms of the Gold Reserve Act of , signed by the President on January 30, an upper limit of 60 per cent for revaluation was added to the previously existing lower limit of 50 per cent for devaluation of the dollar and within these limits the President was given authority, for a period of three years, to vary the gold content of the monetary unit as circumstances warrant.
Dollar and Inflation. The Future of Cash. The Troubled Dollar. Deflation Fears. Dollar Diplomacy.
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