Currency devaluation is a downward adjustment of a country’s currency value. It makes a country’s exports more affordable for foreign buyers and helps reduce trade imbalances.
A country’s currency loses value relative to other currencies on the international market, resulting in lower purchasing power for its residents and higher costs for businesses and consumers reliant on imported goods. This can lead to price inflation, which hurts the long-term economic prospects for a country and increases its debt burden.
Generally, a country with a strong economy and sound monetary policy can avoid the need for devaluation by building up domestic reserves of gold or other valuable assets. This can help sustain the country’s international reserve status and make it a safer investment for the rest of the world.
In a more extreme case, a country that has persistent trade deficits might devalue its currency to stimulate exports. By making its goods more competitive in global markets, a country with a weaker currency can improve its balance of payments by increasing its volume of exports and decreasing its volume of imports.
A devaluation can be counterproductive, however, if other countries follow its example in a race to the bottom. This type of beggar-thy-neighbor policy is a dangerous strategy and can lead to unchecked inflation that ultimately causes even more damage. As a result, several international institutions have been established to prevent repeated rounds of currency manipulation and retaliation. By contrast, a central bank that is independent and has a domestic mandate focusing on price stability and sustainable economic growth can typically avoid the need for devaluation or other currency manipulation tools.