Your Practice. Popular Courses. Economy Economics. Part Of. Global Players. 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.
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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. 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 Currency Depreciation? Currency depreciation is when a currency falls in value compared to other currencies. Easy monetary policy and inflation can cause currency depreciation. Understanding a Currency Peg and Exchange Rate Policy A currency peg is a policy in which a national government sets a specific fixed exchange rate for its currency.
Learn the pros and cons of currency pegs. Develop and improve products. List of Partners vendors. Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency, group of currencies, or currency standard.
Countries that have a fixed exchange rate or semi-fixed exchange rate use this monetary policy tool. It is often confused with depreciation and is the opposite of revaluation , which refers to the readjustment of a currency's exchange rate. The government of a country may decide to devalue its currency.
Unlike depreciation, it is not the result of nongovernmental activities. One reason a country may devalue its currency is to combat a trade imbalance. Devaluation reduces the cost of a country's exports , rendering them more competitive in the global market, which, in turn, increases the cost of imports.
If imports are more expensive, domestic consumers are less likely to purchase them, further strengthening domestic businesses. Because exports increase and imports decrease, there is typically a better balance of payments because the trade deficit shrinks.
In short, a country that devalues its currency can reduce its deficit because there is greater demand for cheaper exports. In , Guido Mantega, Brazil's Finance Minister, alerted the world to the potential of currency wars. While some countries don't force their currencies to devalue, their monetary and fiscal policy has the same effect, and they remain competitive in the global marketplace for trade.
Monetary and fiscal policies that have a currency devaluing effect also encourage investment, drawing in foreign investors to cheaper assets like the stock market. The Trump administration responded by labeling China a currency manipulator. This was just the latest salvo in the U. China trade war , but certainly not the first time China had devalued its currency. While devaluing a currency may be an attractive option, it can have negative consequences.
Increasing the price of imports protects domestic industries, but they may become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand , which can lead to higher gross domestic product GDP and inflation.
Inflation can occur because imports become more expensive. Aggregate demand causes demand-pull inflation, and manufacturers may have less incentive to cut costs because exports are cheaper, increasing the cost of products and services over time.
China has been accused of practicing a quiet currency devaluation and attempting to make itself a more dominant force in the trade market. Some accused China of secretly devaluing its currency so it could revalue the currency after the presidential election and appear to be cooperating with the United States. However, after assuming office, U. President Donald Trump threatened to impose tariffs on cheaper Chinese goods partly in response to the country's position on its currency.
Some feared that this may lead to a trade war, putting China in a position to consider more aggressive alternatives if the United States followed through. Ending those restrictions would provide far more lasting help to farmers and manufacturers than any type of currency manipulation. Ending the trade war will lead to increased U. Devaluing the dollar will not.
Dan Pearson, a former chairman of the U. International Trade Commission, is a senior fellow in trade policy at Americans for Prosperity. Sign In Subscribe Ad-Free. By Daniel Pearson September 18, Related Topics: Sen. Josh Hawley , Dollar. Show comments Hide Comments. Market Overview. Sign up for RC newsletters.
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