Devaluation and revaluation

What is devaluation?

Devaluation is an official decision by a government or central bank to lower the value of its currency against a fixed reference, such as the US dollar, a basket of currencies or gold. Revaluation is the opposite: an official decision to raise that fixed value.

Both terms apply when a currency is pegged, which means the authorities set its exchange rate and defend it. The change happens by announcement, not through day-to-day trading.

Formal definition and edge cases

In a fixed or pegged regime, the authorities publish a central rate, also called a parity. Devaluation lowers the parity, so more units of the local currency are needed to buy one unit of the anchor. Revaluation raises the parity.

Some cases are less clear:

• Floating currencies. When the market sets the rate, a fall is called depreciation and a rise is called appreciation. See currency depreciation and currency appreciation.
• Managed floats. When a central bank stops defending a level and lets the rate jump, news reports often call it a devaluation, even though no new parity is announced.
• Crawling pegs. Small planned adjustments are built into the regime. Analysts usually do not count each one as a devaluation. See crawling peg.
• Currency boards. A change to the board's fixed rate is a devaluation or revaluation in the strict sense. These changes are rare because the board's design is meant to prevent them. See currency board.
• Accounting. In bank and company reports, "revaluation" can also mean restating foreign-currency assets and liabilities at a current exchange rate. This is bookkeeping, not a policy decision.

Worked example (hypothetical)

Take an imaginary country whose currency is pegged to the US dollar at a fixed number of local units per dollar.

1. The central bank announces a new, weaker parity, effective from the next business day. One dollar now costs more local units than before.
2. An importer paying a dollar invoice of the same size now needs more local currency to settle it.
3. An exporter earning dollars receives more local currency for the same sale.
4. A household holding dollar savings sees their value in local currency rise. Local-currency savings buy fewer imported goods.

In a revaluation, the steps run the other way. The anchor currency becomes cheaper in local terms, imports cost less and exporters receive less local currency.

Where you see the terms

• News. "Rupee devaluation" headlines usually describe a sharp fall in the Pakistani rupee against the dollar. In Pakistan this is often a market-driven move rather than a new official parity.
• Central bank and IMF reports. These use the terms when describing exchange-rate regimes and policy changes.
• Trading platforms. Quotes such as USD/PKR or other pegged pairs can show a gap, meaning the price jumps from one level to another with no trading in between. Stop orders may then be filled at worse prices than set. Leveraged forex and CFD trading can lose money fast in such moves. See currency risk and risk management.
• Company accounts. Lines such as "exchange loss on revaluation" record the effect of rate changes on foreign-currency balances.

Related terms

• Bretton Woods system: an era of fixed parities with frequent devaluations
• Dollarization
• Fiat money
• Capital and financial account
• Fundamental analysis
• Currency pairs
• Trading glossary

Frequent questions

What is the difference between devaluation and depreciation?

Devaluation is an official change to a fixed rate. Depreciation is a fall set by the market under a floating rate.

What does revaluation mean?

It is an official increase in a pegged currency's value against its anchor. In accounting, it can also mean restating balances at current exchange rates.

Is every rupee devaluation in the news an official devaluation?

No. Headlines often use the word for any sharp fall in the rupee, including market-driven moves.

Does devaluation always cause inflation?

Not always, but imported goods usually become more expensive in local currency. How much this affects inflation depends on the economy and on policy.