A purely self-sufficient country? Cannot be – no country can live in isolation. There has to be entry and exit of products and services which fosters international trade. Of course, money exchanges hands as it is what products and service are valued on. You buy, you pay, and when you sell, you receive money in exchange – it is the norm. However, since it is international trade, currency exchange rates come to play. Consider currency as a commodity; some are more highly demanded than others. This means that your country’s currency has some international value that is compared to the dollar in most cases – the de facto currency of the first reserve. Two principles apply here. A country might choose to implement a floating or fixed exchange rate system. Under a floating exchange rate system, the regulator allows the market forces to create the exchange value. However, in a fixed system, the regulator might consider revaluation or devaluation of their currency to reflect their desired market state.
What is Currency Revaluation?
When a currency gets revalued, it is the increase in its official exchange rate concerning another foreign currency which is the baseline. Various situations warrant currency revaluation. A common currency that has been subject to much speculation for revaluation is the Iraqi dinar, as it has massively lost value globally. For example, if a nation trades 20 units to the dollar when they do a revaluation, they might make it two times expensive. This means that it is going to trade at 10 units to the dollar. Although countries that utilize a fixed exchange rate (which is rare) can revalue or devalue their currencies, the IMF (International Monetary Fund) regulates these activities to ascertain that these countries don’t gain an unfair competitive advantage over others.
Who Decides a Currency Revaluation?
In every nation, there is a central bank that’s responsible for their monetary and fiscal policies. These institutions are supposed to operate independently; however, government interference is unavoidable as their existence is based upon appointments from the government. Since the central bank is responsible for implementing monetary policies, they can alter the official value of currency via a revaluation.
Is Revaluation a Good Thing?
A country has got to have some valid reasons to settle on revaluing its currency. The advantages and disadvantages of a stronger or weaker currency in a country are highly debatable in the economic platform. Most states that have a fixed exchange rate do a revaluing of their currency to increase the buying power of their currency. Other factors still apply. If a country’s currency has a lower value, it means that their export is going to be very high, which is good for business, but is it? There has to be a balance of trade since an excess surplus is also not that great. So, when a nation chooses to revalue its currency, it increases in value hence making their exports expensive. This means that the importing country is going to look elsewhere for the products or services that they were sourcing from there.
Other Causes of Currency Revaluation
An alteration in a country’s interest rate can make a country pursue currency revaluation strategies to stay competitive in the market. Other countries can do a revaluation of their currency for speculative reasons. For instance, when counties expect a significant economic event to happen, that they suspect is going to affect the strength of their currency, like the recent Brexit, they might revalue to stay profitable despite the outcome.
How Does The Market React to Currency Revaluation?
Since a revaluation of a currency affects trading, there’s definitely going to be a market reaction. It is the role of the IMF to regulate these revaluation and devaluation changes so that governments don’t take advantage of it and get a better competitive edge. If your currency possesses a higher value, it means that your exports are going to be more expensive than before, comparable to the buying country. This means that you will have less international trade. Countries that intend to export more tend to devalue their currency so that their products can be more affordable.
Currency revaluation is a hotly debated topic. Most view it as a poor monetary policy and have a preference for the floating exchange rate that is a more realistic value of a country currency value. However, what if a country’s currency depreciates excessively due to some out of the ordinary cases, like the Iraqi dinar? Then a currency revaluation might be the only solution. Only time will tell if it is an efficient system.
