Devaluation refers to the declining value of the currency in relation to other currencies in the global market, especially against the US dollar. Sometimes, countries devalue their currency in order to improve the trade balance by boosting exports when trade deficits become a problem for the economy. However, sometimes devaluation of currency is forced upon the country when it fails to defend its exchange rate. These ups and downs are very important for the economy of a country in order to remain stable among different economies of the world. So, what causes such fluctuations to currency value? Here are a few causes of currency devaluation:
- For countries like China, currency devaluation is a mechanism through which they compete in a trade war with the US dollar. Although China denies it they have been accused of devaluing its currency to advantage their economy by boosting its exports by selling cheaper goods.
- Secondly, trade deficits can be treated by the devaluation of the currency. Exports will increase and imports will decrease that will help the country to serve their balance of payments especially debts but for a longer run, this strategy won’t work sustainably.
- Forced devaluation of currency is caused by slow economic growth of the country when a country can no longer defend its exchange rate and when a country risks their dollar reserves by spending a lot on buying foreign goods and services.