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  • Dara Madee
  • Posted Articles: 13
  • Last Posted: 2017-05-31 07:53:03
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Three Rationales behind Currency Devaluation

2017-01-19 02:02:06

The world has witnessed how Greece is resolving its mounting debt crisis, how OPEC member countries are trying to balance the oil market by striking an agreement on limiting production, and how the United States – and everyone else in the world – is reacting to Donald Trump’s shocking victory in the US presidential election.

Despite global events to and fro, China still makes it into the global arena, most especially into financial markets.

Several analysts and investors, even the US president-elect, has accused China of devaluing the yuan to the benefit of its economy and to the detriment of its rivals. Of course, the Asian country denies doing so.

Not only China is implementing emergency steps to lower the value of its currency. Kazakhstan followed suit as the nation ditched the tenge’s peg to the US dollar. Such moves have not only affected their citizens but have also fluttered throughout the world.

Now, why do countries deliberately devalue their respective currencies?

Bolster Exports

In a global market, imports are curbed while exports are amplified. Two cents, however. First, prices will begin to increase as the demand for a nation’s exported goods ascends, normalizing the preliminary impact of the currency devaluation. Second, as other countries notice the move favoring their economies, they will be rewarded to depreciate their currencies, resulting in rampant inflation.

Needless to say products from various nations must compete with one another. Automakers in the United States must wrestle carmakers in Japan to gain traction. For example, if the US dollar plunged against the Japanese yen, the price of the vehicles sold by Japanese companies in America, in the greenback, will become less costly than before. Conversely, a more valuable currency make exports more expensive for purchase in offshore markets.

Lower Government Debt

A central bank may be prompted to weaken its currency if the government has numerous sovereign debt to issue regularly. Through time, a devalued currency makes these payments less costly. For instance, the US government needs to pay $1 billion a month in interest payments on its outstanding debts. Now, if that same amount becomes less valuable, it will be easier to shoulder the interest. The $1 billion debt payment will decline to $500 million.

Adhering to the concept of race to the bottom currency could be ignited as the majority of nations bear some debt outstanding in one form or another. Proceed with caution, though. This can make or break a currency’s value. In the case of the latter, a country with a huge amount of foreign bonds can see its interest payments escalating.

Reduce Trade Deficit

As imports become more expensive and exports become cheaper, imports will drop and exports will climb. It upholds an improved balance of payments since imports fall and exports rise, lowering trade deficits. Many countries including the United States record imbalances annually.

Currency depreciation can aid in improving the balance of payments and slash deficits. On the other hand, it boosts the debt obligation of foreign currency-denominated loans when valued in the local currency. This outstanding loan becomes harder to bear. Not to mention it lowers hope among the people in their own currency.