Currency devaluation is a country’s decision to make its currency less valuable on the global market. Generally, this is done to stimulate growth by attracting foreign investment with cheaper assets. Devaluation can also improve a country’s trade imbalances by making its exports more attractive to international buyers.
Countries devalue their currencies when they notice that capital is leaving the country and their national currency is losing value on the global markets. This can be caused by a variety of factors, including excessive inflation or unsustainable levels of government debt.
By changing the rate at which foreign currency is traded for domestic currency, a country can devalue its currency. Say, for example, a country has a fixed exchange rate with another country. To devalue, the country would simply change the ratio, such as making it 10 units of one foreign currency to 1 unit of the local currency. This would make it more expensive to buy products from the other country, which will limit such imports. However, it will make the goods produced by the country itself more affordable to its own citizens and international investors, boosting its domestic economy.
The downsides to devaluing a country’s currency include the risk of other countries attempting to follow suit in a “race to the bottom.” This can lead to tit-for-tat currency wars, which can be detrimental to global financial stability and unchecked inflation. However, if the devaluation is carefully planned and managed, it can be beneficial to a country’s domestic economy and help with external imbalances.