Why do countries devalue their currency


    Why do countries devalue their currency

  • 1 To make their Goods competitive

    Countries which depend heavily on exporting ,such as China, can devalue their currency to make their goods cheaper for other countries and so export more goods.

  • 2 To protect their foreign reserves

    In some cases the limited foreign reserves of a certain country might be used to keep the exchange rate of their currency fixed. If a country decided to preserve its foreign reserves then it allow its currency to be traded freely and this usually causes devaluation.

  • 3 To shrink trade deficit

    When a currency becomes weaker imports decrease and exports increase. This results in an improvement of the trade deficit of the country as it exports more and imports less.

  • 4 To reduce Sovereign dept

    If the country has a higher Sovereign dept compared to foreign dept then weakening its currency will reduce the amount of Sovereign dept.

  • 5 To fight deflation

    Deflation can be bad for the economy. To combat deflation a country might devalue its currency to make goods more expensive. See the advantages of inflation.

  • 6 To encourage tourism

    Tourism based countries might devalue their currency to make holidays in their countries cheaper for foreigners. This devaluation usually results in an increase in Tourism income.

  • 7 To help the economy

    Currency devaluation is sometimes used as a method to help a struggling economy since it can improve the balance of payments.