Currency devaluation is the act of a country changing how much their native currency is worth against other currencies in the global market. This is done to rebalance the nation’s trade deficit and improve its balance of payments. Basically, it’s like the captain of a ship readjusting course to avoid economic troubles and seize new opportunities.
Usually, countries that engage in devaluation do so to make their exports more competitive on the international markets. For instance, China lowered its exchange rate from 7 yuan to 1 US dollar, which makes it cheaper for American consumers to buy Chinese goods.
This also boosts the country’s domestic demand, which in turn creates jobs and increases income for its citizens. This is particularly important for nations that rely on foreign income, such as tourism and remittances.
Some governments may also devalue their currency to control inflation. Inflation is a rise in the prices of goods and services, which can be brought about by a number of factors, including increasing competition and higher demand for imported goods. By making foreign products more expensive in their own currency, the government tries to reduce the demand for imports and thus rein in inflation.
Lastly, some countries may also devalue their currencies to help with debt management. By devaluing their currency, they can make their interest payments in a foreign currency more manageable, which can be helpful if their government is trying to pay off a large amount of fixed debt over a long period of time.