Currency devaluation is the official reduction in the value of a country’s monetary unit relative to other currencies. It is done to boost exports, and correct imbalances in trade and foreign debt. It is one way to reduce inflation, which is a problem for many countries.
Most currencies in the world are traded on a foreign exchange market, and their values are determined by market forces. When a currency loses value, it is called devaluation; when its value rises, it is known as appreciation. A country may choose to deliberately devalue its currency, or it might be forced by external economic pressures.
A devaluation makes a nation’s products less expensive on the international market, and it also makes its imported goods more expensive. This improves the balance of payments by making its exports more competitive and decreasing its import bill. In the long run, it promotes higher economic growth and may lead to lower interest rates as the central bank doesn’t need to prop up prices with high interest rates.
However, it can create political and financial problems. For example, as other countries see that the home country is devaluing its currency, they are incentivized to devalue their own currencies in a race to the bottom, and this can cause severe economic disruptions. It can also increase the amount of foreign-denominated debt a country has to service, which can strain the national budget and reduce confidence in the currency.