Devaluation

Devaluation applies to currencies whose value is officially set or pegged by the authorities. When a currency floats freely and its value falls because of market forces, this is usually called depreciation instead.

For example, if a country pegs its currency at 10 units per US dollar and then changes the official rate to 12 units per dollar, each unit of its currency is worth about 17% less in dollars. The currency has been devalued.

Countries may devalue to make their exports cheaper and more competitive abroad, to make imports more expensive and so reduce a trade deficit, or because they can no longer defend the existing exchange rate, having run low on the foreign currency reserves needed to support it.

Devaluation can boost export industries, but it also raises the cost of imports, which can push up inflation and reduce living standards. It increases the burden of any debt owed in foreign currencies. If people expect further devaluations, they may move money out of the country, worsening the pressure on the currency.