What's Currency Devaluation?

Currency devaluation is when a country’s money loses value compared to other countries’ money. For example, let's say that today 1 US dollar was worth the same was 1 Euro yesterday, but today that same dollar is now only worth 0.8 Euros. In this instance, we can say that the US dollar has devalued.

Who chooses to devalue a currency?

A country's government or central bank makes the choice to devalue a currency by deliberately lowering its official exchange rate.

Why do devaluations happen?

When a devaluation happens, a country's goods become more competitive for people in other countries. Because the currency is now worth less, prices become lower. For example, a $100 toy made in the U.S. might have cost €100 for someone in Europe before the devaluation mentioned above. After the U.S. dollar devalues, that same toy might only cost €80. If those goods cost less for someone in Europe, more of them would be sold abroad, which can help US businesses. Additionally, the inverse is also true. If a currency devalues, it will make imported good more expensive. That encourages citizens of the country to buy domestic, supporting their own economy.

How does it affect consumers?

As previously mentioned, while devaluation can help businesses sell more internationally, it can make life a lot more expensive for people in the country. Because the currency is worth less, the same amount of money now buys fewer goods and services, causing prices to rise and inflation to increase.

Why is this important? Understanding currency devaluation is really important even if you aren't directly trying to trade currencies for a profit. It affects prices, jobs, and trade, so everyday people are impacted daily. Governments and businesses watch it closely to make sure it helps the economy instead of hurting people.