What Does It Mean if a Country Seeks to Devalue Their Currency

8/13/2019 What Does It Mean if a Country Seeks to Devalue Their Currency

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What does it mean if a country seeks to devalue their currency? What are the

implications of a currency devaluation?

A currency devaluation occurs when a country allows the value of its currency to

drop in relation to other currencies.

Why would a country allow this?

Well, a currency devaluation would help to reduce a country's trade deficit. If a

currency's value drops, then exports will become less expensive and imports will

become more expensive to people living in the country.

An example of a country with a large trade deficit is the United States, as they

continually import more than they export, which creates a trade deficit.

A country can also choose to allow their currency to strengthen, which would make

their exports more expensive and their imports less expensive. The United States is

frequently pressing China to "revalue" their currency, which would mean that

China's currency would strengthen relative to other currencies.


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Economic effect of a devaluation of the currency

A devaluation occurs in a fixed exchange rate. A depreciation occurs in a floating exchange rate system. Both mean a fall in the value of the

currency.

Economic Revision Notes on Devaluation1. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for

exports

2. A devaluation means imports will become more expensive. This will reduce demand for imports.

3. Higher economic growth. Part of AD is X-M Therefore higher exports and lower imports will increase AD. Higher AD is likely to cause

higher Real GDP and inflation.

4. Inflation is likely to occur because:

Imports are more expensive causing cost push inflation. AD is increasing causing demand pull inflation With exports becoming cheaper manufacturers may have less incentive to cut costs and become more efficient. Therefore over time costs may increase.

Evaluation:

The effect on inflation will depend on other factors such as:

iv) Spare capacity in the economy. E.g. in a recession, a devaluation is unlikely to cause inflation v) Do firms pass increased import costs onto consumers? Firms may reduce their profit margins, at least in the short run.

vi) Import prices are not the only determinant of inflation. Other factors affecting inflation such as wage increases may be important

5. There is likely to be an improvement in the current account balance of payments.

This is because exports are increasing and imports are falling

Evaluationof a Devaluation

The effect of a devaluation depends on

1. Elasticity of demand for exports and imports. If demand is price inelastic, the a fall in the price of exports will lead to only a small rise in

quantity. Therefore, the value of exports may actually fall. An improvement in the current account on the Balance of Payments depends upon

the Marshall Lerner condition and the elasticity of demand for exports and imports If PEDx + PEDm > 1 then a devaluation will improve the current account The impact of a devaluation may take time to have effect. In the short term, demand may be inelastic, but over time demand may become more price elastic

and have a bigger effect.

2. State of the global economy. If the global economy is in recession, then a devaluation may be insufficient to boost export demand. If

growth is strong, then there will be a greater increase in demand.


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Why Do Governments Devalue Their CurrencyRates?

The value of a currency is determined relative to the value of the other currencies i.e . how much of the other currency can be bought by one unit of your

home currency. In general, this is the exchange rate of this currency pair and it fluctuates over time with currencies gaining or losing value against each

other. When a currency reduces its value against other currencies, this process is called devaluation.

Devaluation is a natural process in the history of financial markets. All currencies witness their currency rates falling and rising and if 10 British pounds

were able to buy, say, 20 U.S. dollars a year ago, today the pound could be devalued and its purchasing power would only be enough to buy only 15

dollars. In contrast to market devaluation, governments around the world sometimes resort to devaluation as a tool to protect their trade balances. Thus,

the local currency is forcedly devalued and its currency rates against other major currencies is reduced while restrictions are often imposed preventing

the home currency from being exchanged at higher rates.

These types of government intervention in the foreign exchange market are a perfect example of official devaluation while the natural market devaluation

is often referred to as depreciation, a process when the currency rates fluctuate downwards. In both cases, the country whose currency is devaluated

could benefit form the lower cost of its export of goods, which now are cheaper to buy by customers in ountries whose currencies are stronger. The

history of trade recalls many examples of intentional devaluation with the purpose of conquering new markets through the lower currency rates of the

devalued currency.

One of the biggest devaluation waves in history was in the 1930s when at least nine of the leading world economies devalued their national currencies,

including Australia, France, Italy, Japan and the United States. During the Great Depression, all these nations decided to abandon the gold standard and

to devalue their currencies by up to 40%, which helped revive their economies and stabilised currency rates.

Meanwhile, Germany, which lost the Great War a decade earlier, was burdened to pay strenuous war reparations and intentionally provoked a process of

hyperinflation in the country. Thus, the Germans witnessed the biggest ever devaluation of their national currency and the currency rates hit rock bottom.

At that time, the currency rate of the German mark to the U.S. dollar stood at several million or billion marks per dollar. On the other hand, this

devaluation helped the German government in covering its debts to the war winners although the average Germans paid a disastrous price for this

government policy.

The governments around the world are often tempted to lower unnaturally the currency rates in order to benefit from the lower value of the national

currency. The lower currency value encourages exports and discourages imports improving the countrys trade deficit and imbalances. However, the

average citizen of a country with a recently devalued currency could suffer from higher prices of imported goods and overseas holiday costs.


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FALLING RUPEE IN INDIA CAUSES AND IMPACTS

Thu, Sep 5, 2013

Social IssuesWe invented money and we use it, yet we cannot understand its laws or control its actions. It has a life of its own.- Lionel Trilling, American literary critic.The most concerning chapter for India during last two years and specifically last two months is the weakening of rupee against dollar. It is not only that rupee has lost its value inthe global context but also dollar has improved its performance in the global trading markets. The outstanding performance of US equities and the improvement in the labormarket has made Americans more optimistic about the US economy, thereby stimulating greater hopes of QE(Quantitative Easing) tapering.The government of India is still unable to generate heavy capital inflows.If US Federal Reserve withdraws its bond buying programme; there will be unexpected outward flow ofmoney leaving India clambering for dollars. The slowdown in the Indian economy has made the situation more fickle.The government has a strong role i n controlling currency in the form of policy regulation and reforms. The current UPA l eadership has failed to strike with some heavy reform togenerate more cash inflows. As a result the government has gradually lost its control over rupee depreciation. Investors sentiment plays a pivotal role over here.Oil and gold imports account for 35 per cent and 11 per cent of Indias trade bill respectively.There has been an uninterrupted demand for the dollar from the oil importerspushing the rupee lower. Likewise the falling gold prices have made the central bank to reduce imports, which increases CAD and hits the currency directly. Indian economyrequires a strong structural reform to maintain a positive balance of payment.Also, government spends excessively as election approaches just to woo electorate votes. This causes the rupee to depreciate. Then the government beats around the bush tocontrol the currency behaviour. Most of the times these measures worsen the economic crisis to a great extent.The foreign institutional investors have been selling index futures and Indian equity market is weakening. As a result there is a heavy demand for dollar and Indian currency aswell as economic situation is looking too gloomy.These worries, combined with a record high current account deficit and now uncertainty over the central banks monetary polic y stance, have prompted foreign investors to sellmore than $12 billion of Indian debt and equities since late May.Reserve Bank of India has taken certain steps and some more to be followed to have a control over rupee.But the big question comes here.what are the implications?And is it that bad overall??The best business prototype anyone can have is to spend in rupees and earn in dollars, which is what the giants of India Inc, including the top IT companies, excel in. Basicallythe sector which is targeting exports for its industrial operations are the one wins the game.Dollar appreciation would be positive for sectors such as IT, pharmaceuticals, hotel, textiles and automobiles which have the total foreign exchange earnings of these firms arefar greater than their forex spends. As much as the rupee weakens, the foreign exchange earners gain provided the other factors remains constant.A sharply declining rupee triggers inflation, broaden the current account deficit, hits investor sentiment and creates burdens for organization with high exposure to foreign debt.The government and the Reserve Bank of India have taken several reform initiatives to resist the downturn, but their success stories are looking gloomy.Buying imported materials will become very costly. A weak rupee will create extra stress on Oil Marketing Companies (OMC) and this will surel y be passed on to the consumersas the companies are allowed to do so after the deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in

overall cost of transportation which will trigger inflation.If the depreciation is steep and without control, it will strike up inflation. As a result the Central bank would have very l ess room to impose further rate cut and thats the burdenthe borrower would have to bear.Indians who have gone to abroad for tours or studies are highly affected in these times. The only smiling people in this context are the NRIs who gai n more on sending moneyto their homeland.As a whole we can say that though weakening rupee is the reason for someones smile it is a real threat for the countrys overall fiscal health and increase the current accountdeficit heavily. But in my opinion this huge downgrade is a temporary phenomenon and the rupee is really oversold. Now the Central bank and Government should work hand inhand and find out the policy measures to stabilize the frightening scenario. I personally hope a further cut in SLR to ease the liquidity to save rupee and also import duty hike ingold and other related materials. RBI can buy bonds to ease liquidity in the market. Finally we can say that the situation is tight and challenging for us, but we can not only hopefor the best but also should contribute the most to get back Indian economy in the driving seat.

What is Depreciation mean?

Depreciation is the decrease in the original value. This can be simplified by understanding that the rupee has become less valuable with respect to the

US Dollar. Rupee depreciation causes the exports to the other countries less valuable.

Weaker currency makes it more expensive to buy imported goods which in turn leads to the problem of inflation

Up till 2000, the exchange rate( INR per USD ) is around 43 rupees. In January 2010 it has become 46 rupees. In November 2011 it has become 55

rupees. On 12th of September,2012 it has recorded as 70.36 INR per USD. At present, it is around 62 rupees.

The reasons for this include many which could be the major or minor imports and several domestic or global reasons. The major imports are the

scarcely available resources such as

- Gold

- Petroleum products

- Refined Oils
http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=1203http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?cat=1http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?cat=1http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=1203


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- Iron and Coal

whereas minor imports also make severe depreciation on the rupee value such as

- Electronic gadgets such as mobile phones, Digital cameras etc..

- Imported perfumes, household items

- Food and beverages

In India, there is a tradition to wear the gold and diamond ornaments for the auspicious occasions. So there is a requirement for these which are not

abundantly available in India. India has to import these from the other countries which are at huge pr ices. When the rupee value gets depreciating, the

percentage for each dollar increases making the demand for the dollar to increase. Moreover, the other major import is the petroleum products which

are scarcely available in India.

The other reasons could be Volatility in Indian markets and the different sectors in India such as industrial sector, mining, agriculture has poor growth in

the economy in this year.

However, Indian government has to take some short and medium term steps in order to retain its value around 40. Besides every individual should

think and discuss about this issue as part of their work for the growth of Indian economy. It could be either using the public transport in order to reduce

the usage of the petroleum products or by minimising the purchase of Gold(because they are the major imports to India). Purchase the products which

are made in India.


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Why rupee crossed 65 against dollar ?The rupee on Thursday hit a new low of 65 to the dollar amid investor scepticism about the policies of the Reserve Bank of I ndia and the Manmohan Singh government. Traders

said the sell-off was intensified by policy flip-flops from the RBI. On Tuesday, the RBI announced that it would inject over $1 billion into the markets, just days after saying it

was working to tighten liquidity. India, however, is not the only country suffering from a weakening currency. Other emerging markets like Brazil, Indonesia, Russia, Turkey and

South Africa are also witnessing a huge currency volatility because of fears that US may end i ts quantitative easing by year-end. The minutes of the Feds July 30-31 meeting,

released on Wednesday, showed that almost all of the 12 members of the policy-making Federal Open Market Committee agreed changing the stimulus was not yet appropriatebut the minutes provided few clues on the potential timing for a reduction and did not mention September specifically, but they did l ittle to dissuade predictions. The tone of the

minutes do not meaningfully reduce the risk of a September taper, Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington was quoted as

saying by Reuters, noting that jobless figures for August would be crucial. Ashutosh Raina of HDFC Bank said that, Yesterdays Fed minutes confused the markets, not giving

timing on tapering. Across the board, EM currencies sold off and the sell-off in equities are also adding to the pressure. In June, Chairman Ben Bernanke sparked an abrupt

bond selloff when he said the Fed expected to trim QE3 l ater this year and to halt it by mid-2014. In recent days, currencies from India to Indonesia have tumbled as investors

fear tighter Fed policy will starve emerging markets of investment. Here are ten things you need to know about why the currency has depreciated despite RBI measures There

are domestic and global reasons for the rupees free fall against the US dollar. Among domestic reasons are high current account deficit and growth concerns. On the global

front, the recovery in the US economy is expected to prompt the central bank there to end the loose monetary policy by the year end. Anticipating this, foreign investors are

pulling out their money from India to invest it back in the US, which is resulting in a scarcity of dollars in India. This is not India specific. All emerging market currencies are

witnessing a similar capital flight. US recovery is also boosting the dollar strength. According to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation

currencies, the pound has gained 0.6 percent this year after earlier dropping as much as 6.9 percent, the euro has climbed 6.4 percent and the dollar has strengthened 4.7

percent. Domestically, the Indian authorities firefighting did more damage to the rupee than salvaging it . While the government has opened up sectors for foreign direct

investment, the RBI has resorted to interest-rate defence of the currency. FDI measures are likely to be fruitful only over the long term, while RBI steps are seen largely as

bandages that will be effective only for the short-term. In order to arrest the volatility in the forex market, the RBI started tightening its monetary policy July 15. It signaled

increase in short-term rates by hiking marginal standing facility rate by 200 basis points. On 23 July and 8 August, it followed up with further tightening measures. All this while,

the rupee continued to decline and interest rates kept going up. On 20 August, the RBI signaled a reversal of tightening policy. According to Macquarie, the Reserve Bank of

India is sending confusing signals on monetary policy, due to which rupee will continue to depreciate. According to Nizam Idris of Macquarie, RBIs announcement to buy bonds

has confused the market and by buying bonds the central bank is subsidising outflow at a better price, so the market is still l ooking to sell the rupee. Last week, RBI restricted

how much Indian citizens and companies can invest abroad to reduce pressure on the rupee, while targeting the current account deficit by banning imports of gold coins andmedallions among other measures. Reuters The RBI also eased some of the rate limits for deposits targeted at non-resident Indians (NRIs), though that i s also seen as unlikely

to attract inflows in the near term given that NRI deposits have seen net withdrawals of $1.1 billion in May and June, according to DBS. Efficacy of t he steps remains in doubt,

given outflows have already been declining this year and that they ultimately do not address the need to attract overseas investments to narrow a current account deficit that hit

a record 4.8 per cent of gross domestic product in the year ended in March. Instead, traders fear the capital restrictions could adversely impact company profits and could lead

to stronger capital restrictions that would scare off foreign investors at a time when the expected tapering of US monetary stimulus is already creating uncertainty in emerging

markets. The intensity of the fall is surprising but the fall in itself was not surprising, said Sanjay Dutt of Quantum Securities. Some of the measures taken by the RBI etc,

havent seemed to have gone down well with the market participants who feel they are very inward looking and retrograde in a manner, he told CNBC-TV18. The steps

taken so far only target residents, but if t his raises expectations that they could potentially resort to capital controls targeted at non-residents, that could have adverse near-term

implications for capital flows, HSBCs Chief economist for India and ASEAN Leif Eskesen said. It will, therefore, be critical to tread very carefully when it comes to capital

controls, to anchor expectations, and also not use it as a substitute for more appropriate and effective measures, Eskesen said in a note to clients, he added. A Reuters poll

showed short positions in the Indian rupee have hit the highest in two months amid sustained doubts over policymakers ability to stabilise the currency. Measures to restrict

capital outflows come as overseas investments from India had already been on the wane, averaging a monthly $400 million in the first half of the year from $710 million in 2012,

according to DBS data. To prop up the rupee in the near-term, markets would need assurances that India can attract foreign flows in an increasingly diffi cult global

environment. Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May. The government has also raised import taxes on gold and silver in an

attempt to narrow the burgeoning current account deficit. The import duty on gold was hiked to a record 10 percent, the third such increase in eight months, while duty on silver

was hiked from 6 percent to 10 percent. The excise duty on gold bars was hiked to 9 per cent from 7 percent. The hike in duties came after Chidambaram said the government

was looking to contain gold imports at 850 tonnes this fiscal year, after imports of 950 tonnes last year. However, as Firstp ost said earlier, Chidambaram may be forced to

introduce more curbs on gold if the 850-tonne limit is to be adhered to. During the first quarter, global demand for gold fell 12 percent to 856.3 tonnes against 974.6 tonnes in

the corresponding period last year. But in India consumer demand for gold in India jumped 71 percent to 310 tonnes, compared with 181.1 tonnes in the year-ago period despite

repeated increases in import and excise duties by the government this year. Firstpost view: RBIs latest measures may curb short-term outflows, but they send a chilling

message of serious crisis. The limited freedom that Indiansordinary citizens and businessesenjoyed on capital account convertibility is now being rolled back bit by bit. They

cant buy gold without paying more for it; they cant buy property; and they cant invest abroad easily to expand business opportunities. India Inc will not be happy.


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How depreciating rupee impacts middle class Indians?

While traditional thought about impact of fall of rupee has been confined to external front of the economy i.e. exports and i mports; now in the globalised scenario, the falling

rupee impacts our day-to-day life in a significant way. The falling rupee potentially can hit our pockets directly and make management of our day -to-day expenses challenging.

In order to understand this, let us look at how rupee impacts our savings and has the potential to derail financial planning: Depreciating rupee can cause loan rates to go up The

Reserve Bank of India (RBI) has left no stone unturned to control fall of rupee against dollar. The measures taken have been very harsh ranging from limiting access to liquidity

adjustment facility, to increasing rates on marginal standing facility to higher average maintenance of cash reserve ratio (CRR). Banks have been made to feel the pinch of

shortage of liquidity. The 10 year G-SEC yield has gone up to as high as 8.5 percent. Left with very limited options now, if rupee continues to slide due to a combination of

internal and external conditions, RBI will have no option but to raise repo rate. Raising repo rate will tantamount to pressing panic button. If repo rate goes up, banks will not

hesitate to pass it on the customers unlike what they do when rates fall. The situation seems to have just reversed from what it used to be three months back when everybody

was expecting interest rates to fall. This transition is purely because of fall in the value of rupee. Rise in inflation Depreciating rupee increases the cost of i mports which has a

direct bearing on the inflation. Basically import of goods becomes costlier whenever rupee depreciates and no wonder it makes impact on our day to day life as we are

consumer of imported products. We have already felt the pinch of it as petrol and crude prices have been increased in past fe w months. But the worst is yet to come. Cost of

crude import is bound to go up with the fall in value of Indian currency. Every fall in rupee is an invitation to inflation, unless managed well by the regulator. Increased inflation

means more expenses which in turn has potential to impact the financial planning process. Increase in the cost of education Increasing cost of education is not just going to

impact those who go out of India to acquire post graduation qualification or specialized education, but also to those Indians who want to be in India and acquire higher

education. Today many students in India write examinations like CFA, CPA, CAIA, ACAMS etc. to acquire educational qualifications. Many certifications in information

technology are also acquired through distance learning and online mode in India which requires payment of money in dollar terms. So the falling rupee may hurt plans of many

India based students who wish to acquire international qualifications based in India. Slowdown and job loss Falling rupee is a recipe for slowdown in economic growth. If the fallof rupee continues, the foreign investment will dry in India thereby creating a gap between investment required for growth and the actual investment made. This may not happen

in immediate future, but this cannot be ruled out altogether. Consistent fall in rupee may also take hot money i.e. FII out of India. While the domestic investment in slowing down

at a fast pace, slowdown of foreign investment at this juncture will strongly impact economic growth. Slowdown does not just impact the creation of jobs it also has potential to

create job losses. The most worrying aspect of fall of rupee is that it has been purely caused by fundamental factors and hence curbing of speculative activities alone cannot

arrest depreciation of rupee. High inflation and high rate of inflation have caused rupee to reach this stage. The demand for dollar has been strong because of higher imports as

well. The middle class Indians need to be ready to face the music if positive policy measures are not initiated by the government in India.


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Some ppt material for depreciation


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Some thong very important

The devaluation and deprecation of currency go more or less hand in hand. Currency depreciation is an economic result, whereas

devaluing a currency is an act that results in currency depreciation. Understanding both of these concepts will help to understand foreign

currency exchange as well as how political events have and can influence the value of currency.

1. Depreciation of Currencyo When a currency depreciates, this means that the currency has decreased in value when compared to another nations currency.

Example of Depreciation

o If you were able to get 1 for every $2 on one day, then the next day you can get 1.5 for every $2, the value of the has decreased. Thisdecrease is known as depreciation. To look at it another way; if country A's currency was equal to the currency of county Z, you would be ableto get a one-to-one exchange of each of the currencies. The next day you attempt to trade $1 ofcountry As currency, and you only get $.50 ofcountry Zs currency in return; hence, country As currency has depreciated. It is now worth only half of the amount it was before in relationto country Z's currency.

o

Devaluation of Currency

o Devaluation of currency is an active economic strategy. It is sometimes used when countries are badly in debt. This occurs when a countrylowers the official value of its currency in relation to foreign currencies. This is intended to raise the price of imported goods and increase the

value of the country's exported goods. This can be a risky economic move because it can spark hyperinflation.

History of Devaluation

o The most notable historical case of currency devaluation is the devaluation of the German mark in the 1920s. After reparations paymentswere required to be paid to the allies of WWI by Germany, the German government suddenly faced a huge onset of debt. The Germansdecided to devalue the currency by printing excess marks to pay the debt. This sparked hyperinflation that caused the mark to be nearly

worthless in Germany. Some historians argue that this economic burden was one of the gateway causes to WWII.

Devaluation and Depreciation

o Both of these concepts involve international economics and foreign exchange trading. Devaluation is a result of natural changes within theworld economy. Devaluation can occur because of several different circumstances. These circumstances also might not necessarily be thefault of the country whose currency was devalued. Other countries' currencies can get stronger which results in a devaluing domesticcurrency. Currency depreciation is an active economic move with the desired result being devaluation of currency on the foreign exchangemarket.

Diff between dep and deval

The depreciation of the dollar is the decrease in the value of the dollar in its own country. The devaluation of the dollar is

the decrease in the value of the dollar against other currencies. One happens because of inflation. The other happens

because of the fluctuations in the global economy

In "freely" and "managed" floating regimes, a loss in currency value i s conventionally called a "depreciation", whereas an increase of currency's

international value will be called "appreciation". If the dollar rise f rom 10 000 yen to 12 000 yen, then it has shown an appreciation of 20%.

Symmetrically, the yen has undergone a 8.3% depreciation.

But central banks can also declare a fixed exchange rate, offering to supply or buy any quantity of domestic or foreign currencies at that rate. In this

case, one talks of a "fixed exchage rate".

Under this regime, a loss of value, usually forced by market or a purposeful policy action, is called a "devaluation", whereas an increase of

international value is a "revaluation".

In other words depreciation is controlled by the international currency rates based on the international stock market indicators; and devaluation is

controlled by the central banks which force exchange rates that devalue the currency


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country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to

purchase all offers of its currency at the established exchange rate. When a country is unable or unwilling to do

so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange

reserves.

A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There

are two implications of a devaluation. First, devaluation makes the country's exports relatively less expensive

for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic

consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports,

and may therefore help to reduce the current account deficit.

There are other policy issues that might lead a country to change its fixed exchange rate. For example, rather

than implementing unpopular fiscal spending policies, a government might try to use devaluation to boost

aggregate demand in the economy in an effort to fight unemployment. Revaluation, which makes a currency

more expensive, might be undertaken in an effort to reduce a current account surplus, where exports exceed

imports, or to attempt to contain inflationary pressures.

Effects of Devaluation

A significant danger is that by increasing the price of imports and stimulating greater demand for domestic

products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates

to control inflation, but at the cost of slower economic growth.

Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic

weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor

confidence in the country's economy and hurt the country's ability to secure foreign investment.

Another possible consequence is a round of successive devaluations. For instance, trading partners may

become concerned that a devaluation might negatively affect their own export industries. Neighboring countries

might devalue their own currencies to offset the effects of their trading partner's devaluation. Such "beggar thy

neighbor" policies tend to exacerbate economic difficulties by creating instability in broader financial markets.

Since the 1930s, various international organizations such as the International Monetary Fund (IMF) have been

established to help nations coordinate their trade and foreign exchange policies and thereby avoid successive

rounds of devaluation and retaliation. The 1976 revision of Article IV of the IMF charter encourages

policymakers to avoid "manipulating exchange rates...to gain an unfair competitive advantage over other

members." With this revision, the IMF also set forth each member nation's right to freely choose an exchange

rate system.


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Whats the difference between depreciation of a currency

and devaluation of a currency?

Depreciation/appreciation refers to the change in price of a currency primarily as a result of changes in demand and supply under a f loating exchange rate

environment. For example, when foreign countries buy Canadian dollars to purchase Canadian resources, the increase in demand for Canadian dollars increases the

value of the dollar (i.e., currency appreciation). Examples of depreciation and appreciation of the Canadian dollar can be seen every day in the market place when you

hear about changes in the value of the loonie.

Devaluation/revaluation refers to a change in the relative value of a currency as a result of deliberate government decision to change the value of the currency under a

fixed exchange rate regime. Examples of devaluation are not as common as depreciation. For more, you can enter devaluation in an Internet search engine to view

more information.

Both currency depreciation and currency devaluation end up with a currency that isworth less than it previously was in comparison to the currencies of other countries.The difference is in how the currency comes to be worth less.

Depreciation occurs only in countries that allow their exchange rates to float. That is,

these countries allow supply and demand to determine the value of their currencyrelative to the currencies of other countries. Depreciation occurs when the forces ofsupply and demand cause the value of their currency to drop.

By contrast, devaluation occurs only in countries that do not allow their exchange ratesto float. These countries governments control the official value of their currency. Theytypically use government money to buy or sell currency so as to keep the exchange ratewhere the government wants it to be. Devaluation occurs when a government decidesthat it needs to have its currency be worth less. It then allows its currency to becomeweaker.

In general, depreciation is considered to be a better thing because it happens naturallywhere devaluation is artificial.
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What Does It Mean if a Country Seeks to Devalue Their Currency