Devaluation

An act, with an author and a date. A country operating a fixed exchange rate or a peg maintains it by standing ready to transact at the stated rate, and a devaluation is the announcement that the rate it will defend is now lower. The opposite announcement is a revaluation. Neither is available to a country whose currency floats, because there is no official rate there to reset.

A peg is defended with reserves and with interest rates: the authority sells foreign currency to buy its own and raises rates to make holding the currency more attractive. Both have limits, reserves being finite and high rates being costly to the domestic economy, and a devaluation is what happens when the cost of the defence exceeds the cost of moving the rate. The move is usually large and it usually arrives after official denials, since a signalled devaluation invites the pressure it is trying to relieve.

The word is used loosely in commentary for any sharp fall in a currency, which erases the distinction that gives it meaning. A currency that falls in the market has depreciated; a currency whose official rate has been reset has been devalued. Gulf currencies, several of which have held dollar pegs for decades, are a live example of the difference: their rates do not depreciate, and the question asked about them is whether the peg holds.