Devaluation

Devaluation, in economics, official act reducing the rate at which one currency is exchanged for another in international currency markets. A government may choose to devalue its currency when a chronic imbalance exists in its balance of trade, part of its overall balance of payments. Such a trade imbalance weakens the international acceptance of the currency as legal tender.

Devaluation occurs when a country has been maintaining a fixed exchange rate relative to other major foreign currencies. When a flexible exchange rate is maintained—that is, currency values are not fixed but are set by market forces—a decline in a currency's value is known as a depreciation.