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MadMarketScientist

Devaluation Definition

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In export-oriented economies like Japan and Switzerland, the central banks hold an official policy of devaluation so as to make the country’s exports cheaper and attract more patronage abroad, as a means of increasing revenue. Whenever market conditions cause strengthening of the currencies in question, the central banks intervene by flooding the forex markets with massive amounts of the local currency, using it to purchase currencies like the US Dollar or other majors. Supply of the currency now outstrips the demand leading to a fall in the exchange rate of the currency. The Bank of Japan intervened three times in 2011 to curtail the strengthening Yen, while the Swiss National Bank introduced a minimum exchange rate peg of 1.2000 for the EURCHF pair, promising to defend that peg “at all costs”. In order to defend the peg, the SNB would have to sell lots of the Swiss Franc to make it cheaper and keep the exchange rate above 1.2000.

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