Currency devaluations in modern times
Since the 1970s, the devaluation of currencies has taken place via the international foreign exchange market. The following reasons can lead to this:
- Comparatively higher inflation and/or lower interest rates dominate the economy in the devaluing country.
- Negative current account balance and/or net outflow of foreign currencies.
- The central bank intervenes and increases the money supply.
- Extreme expansion of the money supply due to quantitative easing.
Currency devaluation brings these consequences:
- The devaluing country becomes more competitive.
- Goods produced domestically for export become cheaper. However, an increase in exports can only occur if there is demand abroad.
- Goods produced abroad become more expensive for the devaluing country. As a rule, demand and import volumes fall. Ideally, consumers buy locally produced goods.
Currency devaluation as an instrument of monetary and economic policy
Experts refer to this as competitive currency devaluation through the planned intervention of a central bank in the foreign exchange market. Measures applied can be, among others:
- Raising or lowering the key interest rate.
- The disproportionate expansion of the money supply.
Nowadays, the central banks of the Western industrialised countries only intervene in the development of the currencies through the key interest rate and the expansion of the money supply. Beyond that, they leave the appreciation or depreciation of their currencies to market forces.
The everyday currency devaluation in the forex market
Every player in forex trading witnesses daily appreciations and depreciations in popular currency pairs.
- You see at the beginning of the session that 1 euro buys around 1.20 dollars.
- At the end of the trading period, the euro stands at 1.18 dollars.
The purchasing power of the common currency has fallen by 2 cents because market participants have brought about a currency devaluation through their behaviour. You can check what is exness personal area if you are interested in currency exchange. In practice, devaluations of 2 cents within a session are very rare and only possible when the occasion arises.
Mario Draghi, in his function as ECB chief, caused market participants to react in this way during speeches on the economic situation. Normally, the value of the euro against the dollar changes by only 30 to 50 pips within a few hours.
In the present, a currency devaluation does not happen overnight but is a process that takes place over several days, weeks or months.
The most striking devaluation of the euro took place between the years 2010 and 2015.
- In December 2010, 1 EUR still bought 1.52 USD.
- By July 2014, the value of the EUR had fallen to 1.37 USD.
- In the context of the euro crisis, there was a rapid devaluation to 1.04 USD in March 2015.
Due to various measures taken by the ECB, market participants regained confidence in the common currency from 2017 onwards.
- The EUR was quoted at USD 1.05 in January 2017 and rose to just under USD 1.25 within a year.
- By 2019, the EUR had depreciated again to 1.10 USD.
- Since November 2020, the euro has fluctuated between USD 1.18 and 1.20.
A currency devaluation is accordingly the result of a lack of confidence on the part of the major market participants. Often-mentioned reasons such as rising unemployment figures, falling productivity and increasing trade deficits are partly responsible, but are less significant than assumed.
You can follow the behaviour of the relevant players when important data is released on your chart. Sometimes negative data leads to no reaction at all or completely unexpected behaviour. Other times, participants react according to expectations.
Market sentiment is not calculable for any analyst, which is why predicted developments occur only rarely and purely by chance.