Currency devaluation is a government’s deliberate lowering of the value of its national currency compared to other currencies. This is a strategy used to correct trade imbalances and stimulate economic growth. However, it can also lead to inflation and trade tensions.
Historically, money was worth the value of the precious metal it was made of, but as those metals became scarce, paper and coins were created as substitutes with their own values. Today, a dollar, euro or peso is backed by the wealth of the country that issues it. But if a country runs out of gold or silver, it can devalue by decreeing that its currency loses some of its value—thereby reducing the amount of wealth needed to back it up.
Devaluation shifts international trade, favoring the devaluing country’s exports by making its goods cheaper abroad. However, devaluation is distinct from depreciation, which happens when a currency’s value is reduced due to market forces in a floating exchange rate system.
Trump and his administration have been linked to calls for a weaker dollar, though Treasury Secretaries past learned not to publicly call for such a thing for fear of triggering market instability. And yet, as the US and its allies engage in a series of trade disputes with China over intellectual property and technology, the Trump team may find itself playing a cat-and-mouse game with foreign governments who want to weaken their own currencies to gain an unfair trading advantage.
