Currency Devaluation Overview
In this topic, I shall discuss on Devaluation of currency, what is the cause of currency devaluation, and the Advantages and disadvantages of currency devaluation. So let’s start with what does means Devaluation. In the end, we shall find out the forex trading strategy in currency appreciation and depreciation.
What is the Devaluation of Currency?
The devaluation of the currency (or currency depreciation) is a decrease in the value of one currency compared to some pattern as the strong price of gold or foreign currencies.
Causes of the devaluation of the currency
There are lots of causes behind for currency crisis or devaluation. The devaluation can occur for various reasons such as lack of confidence in the economy, the deficit of the trade balance, etc.
The Central Bank and the economy of the country support and give value to your money. One of the most common causes of devaluation occurs when the amount of money is in circulation, then each unit of that money has less support is increased and therefore less valuable.
Other causes can be when a central bank or monetary authority by law has been given a new value for the currency by the central bank or concerned authority where there is less demand for it. Such devaluation has the following reasons:
a) To liquefy liabilities
b)To improve competitiveness
c) To prevent capital flight and loss reserves
The advantage of Currency deflation.
So deflation does not have much benefit for an economy the noticeable advantage of the depreciation of the currency in deflation is it can increase the supply of oil abroad. Export can gain big earnings for the country. Devalued currency can make a big difference between the currency value of a country where exporters supply their exported goods or services. As a result export country gets a large value from the importing country. That brings more money to the country. That is one kind of advantage of exporter country.
Disadvantages of the evaluation of currency.
The devaluation of the currency has strong disadvantages. The great impact of the devaluation of currency occurred in foreign trade and mostly on importing goods from other countries. For accomplishing the country’s import needs to buy foreign currency. Consequently makes imports more expensive to buy products/services. Since the procedure takes a greater amount of domestic currency to buy foreign currency that needs to be spent on imports. Further devaluation lowers confidence in the national currency and the economy in general.
Devaluation also causes inflation, although this may be considered an advantage (if very small) or a very big problem if a high percentage, even can lead to hyperinflation.
The impact of a devaluation or depreciation also focuses on the trade balance. The loss of purchasing 5, 10, or 20% in foreign products can be translated directly into the wallets of consumers. Trade balance effect on forex to anticipate forex trader needs to consider this factor well.
Currency Appreciation
The article is on currency devaluation/depreciation but I just pointed here a bit about currency appreciation. The opposite effect of the devaluation of the currency is known as “appreciation” (or currency appreciation) and consists of increasing the value of a currency in the foreign exchange market with respect to others.
How does currency appreciation or depreciation impact forex trade?
To get a better outlook on a currency to need the knowledge in depth of a currency to hope you will get some insight into currency appreciation and depreciation here. When we analyzed technical aspects of currency pairs we observed currency fluctuation patterns for a particular currency pair that is being bound within a trading range, rectangle, or triangle chart pattern. Traders need to conduct an in-depth analysis of a related country’s economic perspective to get proper forex trading signals/opportunities in depreciation or appreciation. Need to be observed in the base currency relative to the counter currency in the pair.
Keep an eye on the Forex news calendar
Get up to date with the forex economic calendar and know the events and results. You can read my previous article on news trading here
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