Explore Blog Reference library Collections Shop. Share: Facebook Twitter Email Print page. What is a currency depreciation? The external value of the pound sterling depreciated sharply against the US dollar and the Euro in the immediate aftermath of the Brexit referendum result What might cause a currency depreciation? A fall in the world price of a country's major export.
A relative devaluation occurs when the foreign exchange value of one currency drops against the exchange value of other currencies. For example, the British pound sterling may trade for more U. This does not necessarily mean, however, that the U.
In either case, the economic roots of currency depreciation are dependent on the productive capacity of an economy and the size of its money supply. Almost every major currency is controlled like a monopoly through legal tender laws.
For this reason, governments and central banks control the factors that influence currency value. Even though these are not traditionally considered to be economic factors, they are nonetheless critical determinants. Money exists as a store of value. Employees trade the value of their working labor for a representative amount of money in wages and then trade that representative value for other goods and services in the market.
As an individual employee creates more value through increased productivity , she will see her salary increase proportionately. Her employer or customers must either give her more units of currency or more valuable units of currency.
If the money supply in a country is fixed but productivity increases, then each unit of currency must store greater value. If the productivity of an economy is fixed but the supply of currency decreases, then each unit of remaining currency must store greater value.
The opposite is also true. When productivity declines faster than the supply of money, the value of each unit of currency drops. First, devaluation makes the country's exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current account deficit.
There are other policy issues that might lead a country to change its fixed exchange rate. For example, rather than implementing unpopular fiscal spending policies, a government might try to use devaluation to boost aggregate demand in the economy in an effort to fight unemployment.
Revaluation, which makes a currency more expensive, might be undertaken in an effort to reduce a current account surplus, where exports exceed imports, or to attempt to contain inflationary pressures. Effects of Devaluation A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation.
If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth. Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. What Is Currency Depreciation? Key Takeaways Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
Economic fundamentals, interest rate differentials, political instability, or risk aversion can cause currency depreciation. The Federal Reserve's quantitative easing programs used to stimulate the economy in the aftermath of the financial crisis caused U. Currency depreciation in one country can spread to other countries. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Understanding Devaluation, the Causes, and the Downsides. Devaluation is the deliberate downward adjustment to the value of a country's currency relative to another currency, group of currencies, or standard. Dollar and Japanese Yen. Partner Links. Related Articles. Economics 9 Common Effects of Inflation.
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