Currency devaluation is lowering the value of a currency. The value of a devalued currency is low particularly to the other nations, because foreigners can now buy more goods in the same amount of money.
There are two ways in which a currency can be devalued.
1. Floating Exchange Rate System
Under the Floating Exchange System, the market forces devalues or revalues a currency, depending on the currency's demand and supply. If a currency's demand increases with respect to its supply, its value will increase and if a currency's demand falls with respect to its supply, it's value will fall.
2. Fixed Exchange Rate System
Under Fixed Exchange Rate System, a currency is devalued intentionally by the policy makers under the influence of the market pressures.
An economy can devalue its currency by printing more currency notes or by devaluing the currency under the Fixed Exchange Rate system. An economy can change its money supply by printing more notes and creating electronic bank credit and then it is added to the economy. Also the demand for a currency can increase significantly, if foreign countries demand their currencies for their local transactions. Similarly if a currency's demand falls down, then it's currency faces devaluation. In times, when a currency's demand has lowered, a country devalues its own currency to attract other countries demand. As the currency is devalued, a foreign country will be able to buy more number of goods with the same amount of money. Therefore, tourists and importers will be willing to deal with countries which have devalued its currencies to gain profit margin.
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