Currency devaluation occurs when a country’s currency loses value relative to other currencies. This can happen for several reasons, including:

Inflation: When a country experiences high inflation, the purchasing power of its currency decreases, which often leads to devaluation. If inflation is higher in one country compared to others, its currency tends to lose value on the global market.

Interest Rates: If a country lowers its interest rates, it may cause its currency to lose value. Lower interest rates tend to make a currency less attractive to foreign investors because they offer lower returns on investments.

Trade Deficits: A country with a persistent trade deficit (importing more than it exports) may see its currency devalue. When a country imports more than it exports, there is more demand for foreign currencies. This can weaken the domestic currency.

Debt Levels: High levels of national debt can contribute to a currency’s devaluation. If investors fear that a country may struggle to repay its debts, they might sell off its currency, leading to a decrease in value.

Speculation: Currency markets are influenced by speculative trading. If traders believe a currency will lose value in the future, they may sell it, contributing to its devaluation.

Political Instability: Political or economic instability can also lead to devaluation. If there’s uncertainty about the future, foreign investors may pull out, reducing demand for the currency and driving down its value.

Devaluation can have mixed effects, such as making exports cheaper and more competitive, but it also raises the cost of imports, potentially leading to inflation.

Lauren Hua is a private client adviser at Fairmont Equities.

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