Competitive Devaluation

Dictionary Says

Definition of 'Competitive Devaluation'


A series of sudden currency depreciations that nations may resort to in tit-for-tat moves to gain an edge in international export markets. Competitive devaluation refers to a scenario in which an abrupt national currency devaluation by one nation is matched by a currency devaluation of another, especially if they both have managed exchange-rate regimes rather than floating exchange rates determined by market forces. Competitive devaluation is considered a “beggar-thy-neighbor” type of economic policy, since it amounts to a nation trying to gain an economic advantage without consideration for the ill-effects it may have on other countries.

Investopedia Says

Investopedia explains 'Competitive Devaluation'


The act of currency devaluation or depreciation improves a nation’s export competitiveness because it lowers the cost of goods exported from that nation for overseas buyers. For example, when the exchange rate is EUR 1 = $1.40, assume a European exporter sells a product in the U.S. at $10, which is equivalent to about EUR 7.14. If the EUR subsequently falls to 1.25, the exporter can slash the price of the product to $9 and still receive the equivalent of EUR 7.20 because each dollar now fetches more euros.

Currency devaluation also has a positive impact on a nation’s trade deficit because it makes imports more expensive. This forces domestic consumers to look for local alternatives to imported products, which provides a boost to domestic industry. This combination of export-led growth and increased domestic demand usually contributes to higher employment and faster economic growth.

The negative aspect of currency devaluation is that it may lower productivity, since imports of capital equipment and machinery may become too expensive. As well, devaluation significantly reduces the overseas purchasing power of a nation’s citizens.

Competitive devaluation is viewed as being harmful or deleterious to the global economy, because it may set off a round of currency wars that may have unforeseen adverse consequences, such as increased protectionism and trade barriers. At the very least, competitive devaluation may lead to greater currency volatility and higher hedging costs for importers and exporters, which may impede a higher level of international trade.

comments powered by Disqus
Hot Definitions
  1. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
  2. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  3. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  4. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  5. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  6. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
Trading Center