Sat 20 Dec, 2008 06:15 pm
From time-to-time I read of a country devaluing its currency (e.g., Russia against the U.S. dollar). Does that mean the Russian central bank was buying the rubles with U.S. dollars that it owned whenever it fell below a certain rate and now it is buying the rubles with U.S. dollars that it owns whenever it falls below a lower rate?
Some currencies are "pegged" and if the government decides to devalue it it means they just decide to make up a lower value for exchange. For example, I lived in Brazil during a time when their Real was unrealistically pegged to the dollar. In reality the Real was worth about 30 cents. But the official rate was trying to stay close to 1:1. While they were moving away from a pegged currency to a floating currency they devalued their currency in order to get closer to the real market value.
In short, that is how currency devaluation works, their central bank just makes up a lower value. In floating exchange rates you can't just decide the worth (and currency depreciation is a better term than devaluation for these cases*) , so you need to attempt to influence the market and this usually involves some kind of coordinated buying and selling.
Also printing large amounts of money is a good way to devalue. Basically if a country owes a lot of money making its currency worthless is one way of getting out of paying it back.
Google Kondratieff: on why debts should be cancelled after 70 years.
Very few governments survive with a weak currency: even tho it helps exports: its a prestige thing