Devaluation is a deliberate downward adjustment of the value of a country's currency relative to another currency, group of currencies, or standard. Devaluation is a monetary policy tool used by countries that have a fixed or semi-fixed exchange rate. It is often confused with depreciation, and it is the opposite of revaluation.
Devaluing a currency is decided by the government that issues the currency, and unlike depreciation, it is not the result of non-governmental activities. One reason a country may devalue its currency is to combat trade imbalances. Devaluation makes a country's exports less expensive, making them more competitive in the global market. This, in turn, means that imports are more expensive, making domestic consumers less likely to buy them, further strengthening domestic companies.
While devaluing a currency may seem like an attractive option, it can have negative consequences. By making imports more expensive, for example, it protects domestic industries that can become less efficient without pressure from competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation.
Currency devaluation arises in many situations, but is due to specific government actions. For example, Egypt has faced constant pressure from a black market for US dollars (USD). The black market boom came about due to a shortage of foreign exchange that hurt domestic businesses and discouraged investment within the economy. To stop black market activity, the central bank devalued the Egyptian pound in March 2106 by 14% compared to the USD.
The Egyptian stock market responded favorably when the currency devalued. However, the black market responded by depreciating the exchange rate of USD to the Egyptian pound, forcing the central bank to take further action. Starting on July 12, 2016, the central bank is expected to devalue its currency again. The stock market reacted favorably to the news, meeting on July 12 and then declining slightly on July 13, when bankers said no devaluation would occur during the week.
