I will give examples where just one day was enough for the national currency to depreciate sharply. They are characterized by devaluation, which lasts more than one month. The purpose of a controlled revaluation is to reduce inflation and affect the balance of export-import operations. If currency A becomes cheaper (devalues) in relation to currency B, then currency B revalues (rises) in relation to currency A. Revaluation is the strengthening of one currency against another.
Local inflation and wage pressure
Historically, when commodity money was used, periods of inflation and deflation would alternate depending on the condition of the economy. “House price inflation” applies to changes in the house price index while “energy inflation” is dominated by the costs of oil and gas. Following the proliferation of private banknote currency printed during the American Civil War, the term “inflation” started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable banknotes outstripped the quantity of metal available for their redemption.
It may decrease if investors begin to buy foreign currency massively. This caused outrage at the WTO and multinational companies, which lost millions of dollars on this and even gave rise to rumors about the beginning of currency wars between the United States and China. Zimbabwe completely abandoned its currency for 10 years, Venezuela still cannot get out of a protracted crisis that has lasted for years, and the series of devaluation processes in Russia in the 1990s ended in default. In both cases, the consequences of devaluation and revaluation were not fatal, which cannot be said about the spontaneous depreciation of money in developing and underdeveloped countries. The fact that the euro fell against the dollar added fuel to the fire, after which Switzerland abandoned the fixed rate that it had been holding since 2011.
What is a Currency Devaluation?
For countries with significant foreign-denominated debt, a weaker currency can exacerbate their debt burdens, making repayments more expensive and challenging. However, the same devaluation makes imported goods costlier, which can lead to higher production costs for businesses reliant on foreign supplies. Understanding these dynamics is essential for businesses aiming to maintain competitive pricing and secure their market position amidst volatile economic conditions. Businesses operating in inflating economies must be vigilant regarding pricing strategies and cost management to mitigate the adverse impacts of inflation on their operations and profitability. The mechanics behind currency devaluation involve various factors that influence a currency’s value. Central banks play a crucial role in the process of currency devaluation, particularly in countries that endorse a managed currency system.
Disadvantages of Currency Devaluation:
The dollar’s 14-year bull cycle has ended, and while reserve currency status remains intact, a period of longer-term depreciation now appears likely. The paradoxical trade deficit – monthly improvements concealing full-year deterioration – reveals the temporary nature of front-loading as a demand response. In this scenario, import volumes settle 25-30% below historical peaks, supply chains fundamentally reconfigure, and economic composition shifts notably toward services. This scenario involves simultaneous policy uncertainty, housing market dysfunction, and consumer preference shifts toward services and away from imported goods. In this scenario, the trade deficit gradually shrinks from current levels but remains substantial, and economic growth remains weak (1.5-2.0% rather than historical 2.5-3% trend). Import volumes remain 15-20% below 2024 levels throughout 2026, reflecting both tariff pressure and weakening consumer demand.
From its first inception in New Zealand in 1990, direct inflation targeting as a monetary policy strategy has spread to become prevalent among developed countries. If a central bank issues and monitors demurrage coinberry review currency as Gesell originally proposed, then it could replace all the money that disappears due to demurrage by printing money at a similar rate. A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. Under a fixed exchange rate currency regime, a country’s currency is tied in value to another single currency or to a basket of other currencies. For the first decades after World War II, the Bretton Woods system initiated a fixed exchange rate system for most developed countries, tying their currencies to the US dollar, which again was directly convertible to gold. The broadest measure of money supply, M2, increased about 45% from 2010 through 2015, far faster than GDP growth, yet the inflation rate declined during that period — the opposite of what monetarism would have predicted.
Rather than operating independently, the three primary forces analyzed in this article – trade imbalance, dollar depreciation, and import/export volume changes – interact through multiple reinforcing feedback loops that amplify economic disruption. The empirical evidence suggests that companies have passed through 61-80% of tariff costs to consumer prices in the short run, retaining a portion of the cost burden while shifting the remainder to end consumers. This implies that roughly 25% of actual inflation in 2025 traces directly to tariff-induced price increases, a substantial contribution to price pressures that have constrained consumer purchasing power. The Federal Reserve estimates these tariff-induced price increases have contributed 0.7 percentage points to cumulative CPI inflation by September 2025. The tariffs economic effects ripple through every dimension of American economic performance. This stacking creates cumulative effective tariff rates substantially higher than any single tariff rate, with research from Oxford Economics placing the effective tariff rate on Chinese goods at 29.3% by November 2025 after incorporating all applicable duties.
Since 1992, devaluation repeated only once again during the 2008 mortgage crisis, and quotes did not return to the previous level. It took almost 15 years for the British currency to regain lost ground, but not for long. On September 16, the Soros Fund increased its short position in the pound from 1.5 billion to 10 billion US dollars. In 1992, it became clear that the British currency was greatly overvalued and the original corridor was incorrect. The idea of cohesion of economic relations was supposed to be the basis of such cooperation, but the countries were not going to lose their national currencies either.
Nucor Continues to Hold Steel Price at $950/Ton: What Q1 2026 Holds for Steel Prices, Tariffs, and Market Recovery
While devaluation can improve export performance and reduce trade imbalances, it may also contribute to higher inflation, reduced real incomes, and increased debt burdens when liabilities are denominated in foreign currencies. Member states were allowed to adjust their exchange rates only in cases of “fundamental disequilibrium,” subject to approval by the International Monetary Fund (IMF). By making exports cheaper on the global market and imports more expensive, devaluation can effectively shrink a trade deficit, bolstering a country’s economy.
If the central bank’s reserves are not enough, the foreign currency will become more expensive, and those who invested in it beforehand will earn. Be faster than the central bank and know the situation with the country’s foreign exchange reserves. Playing coinmama exchange review with the national currency rate against hard currencies is the favorite pastime of China, seeking to win the US trade war. In order to interest the global market rushing to sell pounds after Soros, the British government decided to raise the discount rate (i.e. interest on currency ownership).
Devaluation tends to improve a country’s balance of trade (exports minus imports) by improving the competitiveness of domestic goods in foreign markets while making foreign goods less competitive in the domestic market by becoming more expensive. The reason for this is that speculators do not have perfect information; they sometimes find out that a country is low on foreign reserves well after the real exchange rate has fallen. Economists Paul Krugman and Maurice Obstfeld present a theoretical model in which they state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate).
- When looking at inflation, economic institutions may focus only on certain kinds of prices, or special indices, such as the core inflation index which is used by central banks to formulate monetary policy.
- Economic policy could also affect demand, monetary policy by affecting interest rates and fiscal policy either directly through the level of government final consumption expenditure or indirectly by changing disposable income via tax changes.
- I will give examples where just one day was enough for the national currency to depreciate sharply.
- Currency devaluation is the deliberate method of adjusting the government’s exchange rates and decreasing the currency’s value.
- The United States ran a $295 billion goods deficit with China in 2024 – partially offset by a $32 billion services surplus – but this figure has compressed significantly in 2025 as imports from China declined 22.9% year-over-year in September alone.
- Currency devaluation is mostly practised in cases of fixed or semi-fixed currencies, in developing countries.
On the other hand, if the central bank has a reputation of being “tough” on inflation, then such a policy announcement will be believed and inflationary expectations will come down rapidly, thus allowing inflation itself to come down rapidly with minimal economic disruption. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining inflation. If GDP exceeds its potential (and unemployment consequently is below the NAIRU), the theory says that inflation will accelerate as suppliers increase their prices.
- The double-digit inflation era was of short duration, however, inflation by the mid-1980s returned to more modest levels.
- Debtors who have debts with a fixed nominal rate of interest will see a reduction in the “real” interest rate as the inflation rate rises.
- However, it was found to be impractical because of the unstable relationship between monetary aggregates and other macroeconomic variables, and was eventually abandoned by all major economies.
- One implication was that agents would anticipate the likely behaviour of central banks and base their own actions on these expectations.
- In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country’s currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national currency in relation to a foreign reference currency or currency basket.
- Import volumes remain 10-15% below peak levels, manufacturing gradually expands in protected sectors, and inflation remains 0.7 percentage points above trend due to tariffs.
- Definition of devaluation noun from the Oxford Advanced Learner’s Dictionary
Cost-of-living allowance
As of 2023, the central banks of all G7 member countries can be said to follow an inflation target, including the European Central Bank and the Federal Reserve, who have adopted the main elements of inflation targeting without officially calling themselves inflation targeters. The strategy was generally considered to work well, and central banks in most developed countries have over the years adapted a similar strategy. However, it was found to be impractical because of the unstable relationship between monetary aggregates and other macroeconomic variables, and was eventually abandoned by all major economies. Historically, central banks and governments have followed various policies to achieve low inflation, employing various nominal anchors. With high inflation, purchasing power is redistributed from those on fixed nominal incomes, such as some pensioners whose pensions are not indexed to the price level, towards those with variable incomes whose earnings may better keep pace with the inflation. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services to focus on profit and losses from currency inflation.
Currency Devaluation sets a new and revised exchange rate for currency. The government of the country deliberately reduces the value of its currency in order to adjust the non-desirable exchange rate. Reduction of trade deficit and/or debts, encouraging exports, and discouraging imports are the essence of currency devaluation.
Instead, they are making bets on what the structural tariff environment will look like over the long run. American companies making multi-billion dollar decisions about where to source inputs for the next years face unprecedented uncertainty. Unlike conventional consumption taxes that are distributed to government and potentially recycled as government spending or tax cuts elsewhere, tariff revenue is often captured as budgetary resources but doesn’t immediately translate to offsetting tax reductions.
Sometimes a nation’s leadership promotes a trade policy that benefits certain political insiders, despite the aggregate cost. There are noneconomic considerations such as national security or the need to protect trade secrets. Sometimes a protectionist policy (what 18th-century economist Adam Smith called a “beggar-thy-neighbour” policy) leads to a tit-for-tat response that devolves into an all-out trade war. Nucor Corporation held its hot rolled coil steel price at $950/ton for the fourth consecutive week, signaling a strategic pause in the latest upcycle. We launched this community, pricing, poll because we wanted a clean, honest read on how our audience sees hot-rolled coil prices heading in the next… What remains certain is that 2025 marks a decisive inflection point in American trade policy and global commerce, with consequences still unfolding.
Now, a points devaluation is a very different beast from an earn rate devaluation. Re-accelerating US growth and its reinvigorated asset markets had drawn a line under it in many investors’ eyes. But trying to prod gigantic currency markets into seismic shifts could get very messy indeed. SUDDENLY, the US dollar is back on the slide, on an inkling that Washington is ready to use more than words to reverse its longstanding overvaluation in pursuit of a global trade reset.
In the second case, devaluation occurs legacyfx review on its own (only with floating rate, which is formed by supply and demand). If the rate is floating and falls due to market factors (supply/demand), this is called depreciation. According to another definition, devaluation is deliberate depreciation of the national currency by the central bank. And if a country additionally issued a batch of paper money with its gold supply unchanged, then the value of each banknote decreased in gold terms, i.e. there was a devaluation of the currency.