Definition of Currency Devaluation

What is a currency devaluation? What does it mean if a country seeks to devalue their currency? What are the implications of a currency devaluation?

A currency devaluation occurs when a country allows the value of its currency to drop in relation to other currencies.

Why would a country allow this?

Well, a currency devaluation would help to reduce a country's trade deficit. If a currency's value drops, then exports will become less expensive and imports will become more expensive to people living in the country.

An example of a country with a large trade deficit is the United States, as they continually import more than they export, which creates a trade deficit.

A country can also choose to allow their currency to strengthen, which would make their exports more expensive and their imports less expensive. The United States is frequently pressing China to "revalue" their currency, which would mean that China's currency would strengthen relative to other currencies.

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