Meaning of devaluation of a currency

Devaluation of a currency means the official lowering of value of a country’s currency within a fixed exchange rate system. In devaluation, the monetary authority of the country deliberately make downward adjustment of the value of a country’s money and sets a new fixed rate with respect to a foreign reference currency (currency of other nation) or currency basket. The main purpose of the devaluation of a currency is to improve relative competitiveness in the international trade. It is also resorted to as a corrective action towards solving balance of payment difficulties. That is, when a country devalues its currency there will be strong demand for cheaper exports and import volumes become stifled as the price of foreign-produced goods and services becomes costlier. Because exports increase and imports decrease, it favors a better balance of payments by shrinking trade deficits. It also encourages investment, drawing in foreign investors into (cheaper) assets like the stock market which would further improve balance of payment position.

Although currency devaluation reduces the price of a country’s domestic output, the total effect of currency devaluation depends on the actual elasticity of the supply and demand for traded goods. As manufacturers have less incentive to cut costs because of expensive imports that may cause cost push inflation.

Winners in currency devaluation: Domestic tourist industry, Job opportunities for work force in export oriented industries, Country’s economic growth might increase and trade deficit might decrease.

Losers: Consumers who buy imports, foreign travels, Manufacturers who use imported raw materials, people on fixed income/wages as inflation rise faster.

The opposite of devaluation is known as revaluation.

Revaluation is a change in a price of a good or product, or especially of a currency, in which case it is specifically an official rise of the value of the currency in relation to a foreign currency in a fixed exchange rate system.