The term devaluation refers to the intentional and sometimes forced downward adjustment of the value of a country’s currency compared to other groups of currencies or a standard currency. Generally, currencies are devaluated related to US dollars on international markets. For the purpose of devaluation, countries use monetary policy tools and can have fixed or semi-fixed exchange rates.
The major reason behind the devaluation of currency is that devaluation reduces the cost of the country’s exports to further strengthen the domestic businesses. Imports decreases and exports increases which favour a better balance of payments by decreasing trade deficits. However, the devaluation of currency also increases the debt burden of foreign-dominated loans. Some countries do not forcefully devalue their currency to remain competitive in the global market for trade. It encourages foreign investment into cheaper assets like the stock market.
The devaluation of currency can be used by countries to achieve an economic policy which is important for weaker currencies to boost exports and reduce the cost of interest payments on its government debts. This can, however, create uncertainty in global markets.
Devaluations can have a lot of negative impacts in the longer run. Inflation goes up. It becomes more difficult for countries to service foreign debts, and they lessen the confidence among the people in their currency.
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