A country’s currency can change its value based on supply and demand on the foreign exchange market. Typically, currencies that are traded on foreign exchange markets are not pegged to another currency, meaning they are determined by the market with floating exchange rates. This can lead to natural devaluation of a currency due to market forces or deliberate devaluation by a government.
A country devalues its currency in order to boost the country’s exports. The reason is because a devaluation makes a country’s exports less expensive on the international market, leading to a higher volume of sales abroad. This is particularly beneficial for countries whose economy depends heavily on exports to the global market.
In addition to boosting exports, devaluing the currency can also decrease the burden of debt a country may have by making it cheaper for investors to purchase the country’s debt in foreign exchange terms. However, if the devaluation causes inflation, it will also reduce the real value of foreign investments.
The decision to devalue the currency can also be motivated by political motivations, such as trying to gain a competitive advantage over other countries. In addition, a devaluation can be used to tackle economic problems such as a trade deficit or slowing domestic growth. It can also be a way to control inflation by increasing the cost of imports and decreasing demand for foreign goods. Inflation can also be caused by a rapid increase in exports and devaluation can help curb this problem as well.
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