TEMPO.CO, Jakarta – Every passing day, the looming effects of global financial issues continue to snowball, affecting both governments and its people.
Traversing beyond borders, the severity of currency devaluation remains one of the most conspicuous concerns among all. With the fear of tariff policies still entailing, what could possibly be the predominant reason behind a country’s decision to devalue their legal tender?
What is Currency Devaluation?
Currency devaluation is the act of weakening the currency face value by a country’s government. Investopedia suggested that currency devaluation is seen as a determined attempt to resurrect local products. At times when such events occur, the demand for imports experience a significant fall, which saves some room for increased export activities.
Currency devaluation has become more common in modern days after the gold standard was largely forgotten, allowing exchange rates between countries to face fluctuating markets. Consequently, a currency devaluation isn’t only affecting the home-country, but also many nations involved in a tied international trade community.
What are the Reasons Behind Currency Devaluation?
There have been many instances proving that currency devaluation might not be an excellent path to choose. This financial strategy especially creates precedent currency war between various countries. To understand more about the entire notion, take a look at these reasons behind currency devaluation below.
1. To Reduce Trade Imbalance
Trading imbalance isn’t a surprising concept for a country, but when they fall victim to trade deficits, it becomes a different story. Currency devaluation is believed to overcome such events, expecting the increase of export activities compared to imports will be sustainable. But, many critics, including Investopedia, stated that currency devaluation puts the debt burden of foreign-denominated loans. This issue is an ongoing debate among developing countries which rely their economy on bigger nations.
2. To Surge Exports
Becoming an export haven is nearly every country’s dream. And, devaluing its home-base currency is one of the largest decisions for a government to take. As a consequence of the rising prices against devalued money, consumers will turn from imported goods.
On a bigger scale though, if the exported goods have a surge in demand, the price will inevitably start to rise, which eventually affects other countries. Once again, currency war is nothing short but unavoidable.
3. To Decrease Government Debts
With fixed payments, currency devaluation makes it possible to decrease the amount of government debts. This strategy, however, will not cut it if a country has sizable foreign debts to begin with. Rather than reducing, devalued money can create bigger interest problems in the future.
The Risk of Dollar Devaluation
Dollar devaluation has the potential to make the economy less competitive and less efficient, according to Forbes. If the United States decides to weaken its dollar, the global supply chains will eventually be affected.
Pricier import goods are nothing but hurdles when the country still lacks the presence of raw materials, intermediate goods, and capital goods. Anything akin to borrowing costs will only inflate then, and Americans are bound to fall victims to the policy.
In today’s volatile global economy, currency devaluation stands as both a strategy and a gamble. While it may offer temporary relief through boosted exports and narrowed trade deficits, the long-term consequences cannot be ignored. Similarly to another money policy, deflation isn’t always a healthy parameter for a country.
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