Currency devaluation is an adjustment of a country’s currency value relative to other currencies on the international market. This usually improves the country’s balance of trade (exports minus imports) because it makes its exports less expensive abroad and foreign goods more expensive in its own market.
Countries that have a free-floating exchange rate, on the other hand, cannot devalue their currencies. This is because the value of a country’s currency is determined by the supply and demand of the global currency market.
A government that is heavily in debt might devalue its currency to reduce the amount of money it owes. This allows the country to pay its bills more easily, but it also raises the cost of traveling abroad and makes it more expensive for citizens to purchase foreign goods.
Another reason for a country to devalue its currency is to increase its competitiveness in international markets by making its goods and services cheaper than those of its competitors. This can also help its own economy by encouraging domestic production and consumption.
A country that devalues its currency must be careful not to upset the market. For example, if one of its trading partners also devalues its currency, the global economy may suffer a currency war that triggers economic instability and hurts investor confidence. In addition, if a nation devalues its currency while other nations maintain their fixed exchange rates, it is a form of beggar-thy-neighbor policy that hurts all traders.