Devaluation vs Depreciation of currency

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Currency Devaluation vs Currency Overvaluation

• Hadiqa Aamer
• M.Sc. Economics
• 13-ARID-3412
• Econ - 730

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Exchange Rate

• Exchange Rate is the price of one currency in
  terms of another.
• Interbank closing rates for dollar on 02-03-2009
  
• Buying Rs 79.88
• Selling Rs 79.92
• (1 EUR1.5 CAD) It means 1 Euro 1.5 Canadian
  dollar
• so 1.5 is the price at which we can buy Euro
  in Canadian dollar.

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Exchange Rate Regimes

• In a fixed exchange rate system foreign central
  banks stand ready to buy and sell their
  currencies at a fixed price in terms of dollar.
• In a flexible(floating) exchange rate system, the
  central banks allow the exchange rate to adjust
  to equate the supply and demand for foreign
  currency.
• When central banks intervene to buy and sell
  foreign currencies in attempts to influence
  exchange rates the system is known as managed
  floating or dirty floating.

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Devaluation vs Depreciation of Currency
Devaluation means official lowering of the
value of a country's currency within a fixed
exchange rate system, by which the monetary
authority formally sets a new fixed rate with
respect to a foreign reference currency. (Supply
increased in response to decrease in price) In
contrast, depreciation is used to describe a
decrease in a currency's value due to market
forces, not government or central bank policy
actions. (Price is decreased in response to
increased in supply)
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Devaluation vs Depreciation
A devaluation takes place when the price of
foreign currencies under a fixed rate regime is
increased by official action. Whereas,
depreciation takes place when, under floating
exchange rate regime domestic currency becomes
less expensive in terms of foreign currency
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Devaluation vs Depreciation
Supply increased in response to decrease in
price Price decrease by Government first.
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Depreciation
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Overvaluation vs Appreciation
 Revaluation/Overvaluation of a currency is a
calculated adjustment to a country's official
exchange rate relative to a chosen baseline. The
baseline can be anything from wage rates to the
price of gold to a foreign currency. Rise of
currency to the relation with a foreign currency
in a fixed exchange rate. In floating exchange
rate correct term would be appreciation
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Appreciation and Revaluation A revaluation
takes place when the price of foreign currencies
under a fixed rate regime is decreased by
official action. Whereas, appreciation takes
place when, under floating exchange rate regime
domestic currency becomes more expensive in terms
of foreign currency.
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Appreciation
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How currency appreciates A currency appreciates
as a result of increased demand for that currency
on world markets its value in the world market
increases. This increase in demand can occur for
several reasons 1.When a country's exports are
high, the buyers of these exports need its
currency to pay for those exports. 2.When the
country's central bank increases interest rates,
people will want that currency to deposit in the
banks to earn that higher interest rate. 3.When
employment and per capital income in a country
increase, the demand for its goods and services
increases, along with demand for that country's
currency in the local market. 4.When the demand
of the currency is high in foreign exchange
market 5.Due to Government borrowing or loosening
of fiscal policy. See Twin deficits hypothesis
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We can take same determinants for deprecation
working in opposite direction as compare to
appreciation. For more information
visit www.Wikipedia.com Regards By Hadiqa
Aamer.