In this topic I shall discuss on Devaluation of currency, what is the cause of currency devaluation and Advantages and disadvantages of currency devaluation. So let’s start with what does mean Devaluation. At the end we shall find out the forex trading strategy in currency appreciation and depreciation.
What is Devaluation of Currency?
The devaluation of the currency (or currency depreciation) is a decrease in value of one currency compared to some pattern as the strong price of gold or foreign currencies.
Causes of devaluation of currency
There are lots of cause 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 a country support and give value to your money. One of the most common causes of devaluation occurs when the amount of money there is in circulation, then each unit of that money has less support is increased and therefore less valuable.
Other causes can be when central bank or monitory authority by law given a new value for the currency by central bank or concerned authority where there is less demand for it. Such devaluation have following reasons:
a) To liquefy liabilities
b)To improve competitiveness
c) To prevent capital flight and loss reserves
Advantage of Currency deflation
So per deflation has not much benefit for a economy the noticeable advantages of depreciation of currency in deflation is it can increases supply of exporting good to abroad. Export can gain big earning for country . Devalued currency can make big difference between currency value of country where exporters supplies their exported goods or service. As result export country get large value from import import country. That brings more money to county. That is one kind of advantage exporter country.
Disadvantages of devaluation of currency
For devaluation of currency have strong disadvantages. The great impact of devaluation of currency occurred in foreign trade and mostly on import goods from other country. For accomplishing county’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 and that need to expend in importing. 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 proper trading signals forex traderneeds to consider this factor well.
The article is on currency devaluation/depreciation but I just pointed here a bit on currency appreciation. The opposite effect of the devaluation of the currency is known as “appreciation” (or currency appreciation) and consists in increasing the value of a currency in the foreign exchange market with respect to the others.
How does currency appreciation or depreciation impact forex trade?
For getting better outlook on a currency need the knowledge in depth of a currency hope you will get some insight of about currency appreciation and depreciation here. When we analysis technical aspects of currency pair we observed currency fluctuation pattern for a particular currency pair that is being bound within a trading range, rectangle or triangle chart pattern. Used to trader need to depth analysis on related country’s economy perspective to get proper forex trading signal / opportunity in Depreciation or appreciation. Need to observed in the base currency relative to the counter currency in the pair.
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