Devaluation card of national currencies as a percentage of the US dollar
Map of the devaluation of national currencies as a percentage of the US dollar for the period from January 1, 2014 to August 24, 2015.
Devaluation (Latin de - decrease; Latin valeo - to have a value, cost) - a decrease in the gold content of the monetary unit in terms of the gold standard. In modern conditions, the term is used for situations of official depreciation of the national currency in relation to hard currencies in systems with a fixed exchange rate set by monetary authorities.
Devaluation is a decline in the real exchange rate dictated by economic policy (the term is used in the research work of the International Monetary Fund).
Devaluation is seen as an instrument of central banks for managing the national currency, the opposite of revaluation.
Under the conditions of a floating exchange rate, there is no direct official assignment of the value of the national currency. Therefore, the term depreciation (English depreciation) is used for the situation of currency depreciation, and the term appreciation (English appreciation) is used for the situation of currency appreciation. The central bank can only change the rate by indirect methods (currency intervention). Under these conditions, depreciation or price increase will not be the result of the adoption of an official document, but the result of a change in the value of a currency under the influence of market mechanisms.
Devaluation and inflation
The term “inflation” is close in meaning to the term “devaluation”, but the former is more often referred to as the purchasing power of the national currency in the local commodity market, and the latter as purchasing power in relation to foreign currencies. In meaning, both are characterized by a change in purchasing power. Often, currency devaluation can be one of the causes of inflation within a country. However, foreign currencies are also subject to inflation, so inflation is possible without devaluation. If foreign currencies are subject to deflation, then devaluation is possible without inflation.
Types of devaluation
There are official (open) and hidden devaluation. With an open devaluation, the Central Bank of the country officially announces the devaluation of the national currency, impaired paper money is withdrawn from circulation, or such money is exchanged for new, stable credit money (but at a rate corresponding to the depreciation of old money, that is, lower). With hidden devaluation, the state reduces the real value of the monetary unit in relation to foreign currencies without withdrawing the depreciated money from circulation. Open devaluation causes a decrease in commodity prices, the result of hidden devaluation is a rise in prices for goods.
Causes of devaluation
The reasons for the devaluation of the national currency may be inflation or a deficit in payment balances. Although the devaluation is caused by macroeconomic factors, a direct depreciation of the currency is caused by the decision of the regulatory authorities in the country. Such a decision could be the official decline in the rate fixed by the country's leadership, the rejection of support for the currency exchange rate, the rejection of pegging the exchange rate to currencies of other countries or currency baskets in order to reduce the country's balance of payments deficit, increase the competitiveness of manufactured goods on the world market, stimulate domestic production.
Risks of devaluation
Under the risk of currency devaluation refers to the risk of a sharp stressful decline in the exchange rate of the currency relative to other currencies. The possibility of assessing the risk of devaluation essentially depends on the form in which it occurs. A decline by the country's leadership of a fixed rate can be predicted in advance; spontaneous devaluation caused by the inability of regulators to maintain the exchange rate is difficult to assess. On expectations of a sharp fall in the exchange rate, investors are beginning to invest in more tangible media. But, nevertheless, this is a last resort.