A country may decide to devalue its currency to make it more competitive in global markets and encourage export growth. However, this has broader social impacts that affect the economy as a whole. In countries where the economy relies heavily on tourism or remittances, devaluation may increase visitor arrivals as it makes foreign visitors’ money go further. However, the cost of living for citizens can also rise significantly, impacting low- and middle-income households the most. This can impact consumer spending, which can impact businesses across sectors.
Devaluation can be done through a number of mechanisms, including increasing interest rates, decreasing reserve requirements, and direct intervention in the foreign exchange market. However, these strategies are often met with international scrutiny and can have unforeseen consequences.
Generally, devaluation improves a country’s balance of trade (exports minus imports) by making its domestic products more competitive in global markets and less expensive to buy abroad. However, it also increases the prices of imported goods in the domestic economy and exacerbates inflationary pressures as demand for imported products rises.
Some analysts also argue that devaluation can help reduce a government’s debt burden by increasing the real value of its dollar-denominated foreign currency holdings. However, this would require the US to renege on its commitment to not target an exchange rate and undermine the principle of openness that underpins its role as the world’s reserve currency. It is unlikely that the US or any of its major trading partners will pursue such a policy.