Foreign Exchange Markets: Devaluation and Revaluation

We are re-posting this popular article about the foreign currency and the devaluation and revaluation systems. After all, what’s the point of trying to predict foreign exchange markets (FOREX) if you don’t even know how the market moves and reacts to change? The world’s largest market that is open 24 hours does react to certain changes and you need to know how to watch and interpret these movements. Why let some third-party web application make predictions for you when you can do the work yourself?

Devaluation and Revaluation of Currencies



For all of our examples we will use the comparison between $ (dollar) and € (Euro). To depict what occurs in the economy we will use a model (economists like models). The model employed is called the AA–DD model.

Here is a quick summary of the model. The AA curve represents the asset market and the DD curve represents the output market (goods and services). The X-axis represents production (or GDP (Y)), and the Y-axis depicts the appreciation or depreciation between the domestic currency ($) and foreign currency (€ in this example). For more information on how these models are derived please visit the international economics study web site.

What happens to the domestic economy when currencies are devalued or revalued?

First devaluation:
Devaluation An announcement to Increase (depreciate) $ with respect to € will lead to the following in domestic markets: Increase of exports (since goods are cheaper), decrease of imports (more expensive to buy); the current account will increase which all leads to increase of Y.

What about the opposite? What happens to the domestic economy when the currency is revaluated?
RevaluationQuite simply the opposite. An announcement to decrease the exchange rate (appreciate the currency) means decrease in exports, a possibility their will be an increase in imports, and a decrease of the current account. This almost means that Y decreases and C (consumption). You will have a stronger currency at the expense of lower consumption, loss of jobs, etc. This is why China is not in favor of revaluating.

The US on the other hand would like China to revaluate their currency. This would do a few things, namely, decrease the trade deficit for the US. It’s also in the interest of China to revaluate as it would slow a heated economy. The idea is if you build to fast then you’ll have too much capacity and note enough work to go around (which could deflate the economy when nobody has work). Of course, the flip side to that threat is there’s no end in sight for China’s growth….

There you have some basic examples of what happens to the economy upon devaluation or revaluation announcements.

20 thoughts on “Foreign Exchange Markets: Devaluation and Revaluation

  1. Fehmeeda jamali

    This is a great website I ever visited. I gained a lots of very important information.I request you whenever there is a new article on this site please please send it via e-mail to me .Thanks

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  3. Aforka C Ibe

    The material is fine for my research.

  4. why a country needs to use US $ or GBP as a becnmark?? What are the criteria?? could you please explain?

  5. barry econ

    Quite simply it is perceived to be a strong currency that the country can default o in the even of a crisis. Benchmark is also called a ‘vehicle currency’.

  6. i know they are the vehicle currency. my question is why they are vehicle currency ?? suppose, Diner has no or almost very little impact compared to a change in US $ . My question is why is that?? is this because of the worldwide investment of US companies or some other effect??

  7. barry econ

    Yes that part is true. Stability of currency is not the only thing to look at. Seeing which economy is strong on the global scale is also a factor. the US for the longest time was a net importer to a WIDE degree. Cozying up to them meant less cost on exchange rates etc. It also meant a degree of stability to peg to another ‘stable’ economy. Right now the US isn’t so stable so you see more movement to other currencies like the Euro.

  8. the kwait diner is more valuable than US $. is this because they have very high level of US dollar reserve due to huge export of oil?? But as their global investment is very low/almost nothing compared to the US therefore no country value their currency against kwait diner , is this correct??

  9. Bob Mathews

    I own an portfolio of european and emerging mkt bonds. If the currencies which hold these bonds goes down in value in relationship to the US Dollar, the value of their interest payment would also go down. BUT if USD is likewise depreciating, the bonds should hedge against the loss of value of the interest payment??

  10. barry econ

    Sounds to me you just loose twice; although, I’m not much of a bond guy so I could be wrong. If both currencies depreciate by the same value you don’t loose at all. But if they keep depreciating eventually you loose purchasing power.

  11. Jojo

    The explanations are very clear and understandable. But I could not figure out what is the economic impact of revaluation to the people especially those working abroad. There is something missing that I am looking for. In revaluation, example: If an expatriate income is in riyals that used to be 3.75 against 1 dollar, if it is revalued by 20% what would be the exchange rate against 1 dollar? Is it beneficial or a disadvantage to an expatriate worker?

  12. barry econ

    Technically you should be able to buy more. If you are paid in riyals then your riyals will buy more dollars if the country revaluates. You see, China won’t revaluate because their goods will become more expensive and thus exports will decrease slowing the economy.

  13. Rodney

    Are there specific rules outlining the necessary procedures for any currency to revalue.

  14. barry econ

    No since it’s up to a country to decide whether they’ll revaluate. International pressure may force reavluation, but in reality it’s up to the monetary policy of country to make the choice. Generally it’s tough for a country that’s pegged to revaluate (it appreciates the currency thereby making exports more expensive).

  15. mene o. lucky

    pleasd notify me of any new article b/c i have gain alot

  16. In so far as depreciation is considered a sign of economic weakness, the credit of the nation may be jeopardized. This devaluation may dampen investor confidence in the economy and damage the ability of the country to foreign investment.

    1. darren

      Not only that the depreciation will discourage foreign investment in short term investments.

  17. Gordan Finch

    The IMF imposed tax hikes on high fuel prices is easily recognised by the public as being the prime cause of inflation and Europe’s failure to export itself out of debt. Whilst paying inflated prices for raw materials with £ Sterling devalued by BOE then exchanged for an overvalued Euro to pay the invoice. (School kids can tell you its destroying Britain economy.

    The same applies to France Germany Spain Italy etc who purchase raw material and commodities with an overvalued irrevocably fixed Euro. Through a range of currencies, but in a $ dollar oil world, “all produced goods cost more.

    Is this not clear to the BOE or its buddy the IMF spinning the hype and crap to politicians? While destroying Britain’s AAA status and bankrupting Europe’s taxpayers.

    In simple terms for the blithering idiots (no taxpayers no cash for the treasury.

    Now if the crooks in suits need some help, there are thousands of school kids that are much more intelligent more cost effective much better and they can multitask whilst on holiday, hacking some Government computer riding a bike and texting mum.

    These kids and SME businesses are their future, and ours but consecutive Governments have taken the bribes from blue chip PLC, Corporate, Banks and Insurers. That destroyed small business with IMF Government led austerity red tape and taxes fed to Politicians by International Malicious Fraudster the crooks in suits.

    Britain is a systemically lead system of fraud that starts at the helm of Government spiralling downwards through the Ministries, Central and Local Government, Politicians and Police. Then onto the high street where the public is deceived into believing they buy goods and services from competing companies. The fact is that most of our towns and cities are dominated and controlled in a monopoly by a few PLC companies, (with thousands of names) itsfraud and the Treasury and the FSA are aware of this mass deception. They control it.

    Everyone hate Banks, they give you an umbrella when it’s fine and take it away when its wet, they do nothing positive for anybody except take care of themselves. They’re first in with their fees and first out when there’s trouble.

    Banks compound interest charges are unconsciously the greatest fraud imposed on every homeowner taking out a Mortgage. Until you check out the costs detail the facts and point the finger, or shout out loud and expose the fraud, it will carry on, until then they own you your home and your shoelaces.

    Fraud, fuel tax, duty, vat and overvalued Euro have replaced investment exports growth hope and prosperity. With no work no prospect no future no faith and no hope.

    The public and business do not trust lying corrupt Government, Politicians, Banks, or Insurers for good reason. Society is divided black and white, rich and poor, north and south, corrupt authority and criminal minority, political correctness and public awareness,

    Fraud, corruption, rip off, and deception has become entrenched in Insurance, Banking, Corporations, Authority, Government and its Politicians.

    Money has become “power” a law buying all or someone; legality for certain sections of society like those above no longer exists or matters.

    Courts feed off the weak less able to defend with meagre incomes, while setting free corrupt corporate insurers, banking gangsters, ministerial fraudsters, and sexual predators who have money and friends in high places.

    Organisations such as the IMF, WB, BIS, ECB, UN, starve the poor and engorge the wealthy. The IMF appears benevolent, yet is the Pawn Broker” only concerned about loan payment and profits. Its favours the wealthy nations, at the expense of the poorer economies who suffer its imposed austerity, unemployment, lost productive capacity, low exports, lack of business investment, a stagnating economy, low consumer spending, inflation and escalating debt and interest, while the IMF enforce a sale of viable assets.

    Well forgive me, but these basket cases have ruined every country they helped, just look at Europe; its time a reality check was carried out on the International Malicious Fraudsters, they just steal from the poor, and fill their fat wallets.

    QE, a nice name to deceive the public. A bailout of the banks that were caught out stealing is the truth.

    Even if the riots are under control now. The problem that caused it hasn’t gone away. Itsfraud, there is no respect for a corrupt Government.

  18. Ajax Financial

    Well done for all your hard work in providing this high quality blog.Thank you for the updates.

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