The essence of devaluation
The term "devaluation" originates from Latin: “de” means "decrease" and "valeo" means "value". Thus, devaluation is about a decrease of a value. The term is usually used with the name of a currency which decreases in value: e.g. the devaluation of the tenge, the devaluation of the rouble, and so on. As a rule, a national currency drops relative to the currencies of more developed economies (e.g. the fall of the rouble against the dollar, the euro, the pound). In practice, devaluation is one of the reasons for inflation: due to the weakening of a country's economy (because of wars, sanctions, disasters, and the like), its national currency depreciates against more powerful currencies.
Devaluation = solution
Devaluation is not always caused by the change in market relations or other uncontrolled processes: it sometimes serves to solve a problem faced by a country's national bank. The Central bank is authorized to change its monetary policy according to the country's needs. For example, in order to increase export revenue, the Central bank may initiate the devaluation of the currency. Thus the dollars gained through export will be eventually exchanged for more national currency.
Outside the system
Still, there are some exceptions. As a rule, devaluation can occur for both above mentioned reasons in most economies. But there are some countries whose national currencies don't depend on other currencies' rates. An example of those countries was China until recently. The Yuan wasn't a floating currency and was fully dependant on the country's monetary policy. In those countries, devaluation may only be systematic, initiated by the Central Bank. The PRC is currently working on the "release" of the Yuan so that it could become a reserve currency.
Who's afraid of devaluation and why?
A few groups of people, actually, and for many reasons
One group is people who don't have any savings for a rainy day. They live paycheck to paycheck and are strongly dependant on inflation-connected prices. As we know, inflation is a consequence of devaluation. Unfortunately, there's only one choice for those people: to curtail their expenses. The second group of people have some savings. These are investors who have bank deposits or cash savings. They dread that currency they're saving up money in will lose its value, because the fall of the rate will decrease the value of their savings. There's still a solution: to diversify risks by investing in different currencies, metals or real estate.
Who's not afraid of devaluation?
If you are a professional trader, you will hardly be worried about losing money because of devaluation. The question that will matter is how and how much you can earn from Forex during a devaluation period. If you trade wisely and consider the state of economy, you can snatch a large sum. You know already how much you can earn from Forex. But do you know how to earn more when one of the currencies is tumbling?
What shall we do?
Do what you must! Follow the news and important macroeconomic releases, read analytical materials, make your own conclusions and trade! Use the tumbling currency as a tool to earn from. Don't miss the peak! As I've mentioned in my previous articles, market volatility periods are very lucrative for traders. These are the very conditions for you to make a fortune. But remember about trading wisely, diversifying risks and using a right approach.
Good luck! See you later, friends!
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.