What Is Devaluation?

Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency, group of coins, 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.

Understanding Devaluation

Currency devaluation is a deliberate downward adjustment of the value of a country’s currency against another currency.

A devaluation is a tool used by monetary authorities to improve the country’s trade balance by boosting exports when the trade deficit may become a problem for the economy.

After devaluations, the same amount of a foreign currency buys more significant quantities of the country’s currency than before.

This means that the country’s products and services are likely to be sold at lower prices in foreign markets, making them more competitive.

Devaluation usually occurs when a government notices regular capital outflows (or capital flight) from a country or a significant trade deficit (where the total value of imports outweighs the full value of exports).

Governments can use this when their country has a fixed exchange rate or a semi-fixed exchange rate.

Governments devalue their currencies to improve their trading position in the world.

For example, in 2015, the People’s Bank of China (PBOC) devalued its currency by changing the market mechanism for fixing the yuan against the dollar.

This made the yuan weaker and Chinese exports cheaper.

Due to this devaluation, there were fears that other governments might seek to protect their export markets and devalue their currencies, possibly starting a currency war.

Currency Devaluation vs. Currency Depreciation

Devaluation is a deliberate action and should not be confused with currency depreciation, which is a fall in a currency’s value due to non-governmental activities.