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Foreign Exchange

Devaluation: Ready, steady, devalue

Talk that several countries have entered a competitive devaluation race is wide of the mark.

Politicians invariably misunderstand foreign exchange rates, often ascribing a degree of national pride to the level of their currency. Normally, having a strong currency is taken as a suggestion that all is well, even if it has a negative impact on a country’s economy. For instance, the ejection of sterling in September 1992 from the European Exchange Rate Mechanism was swiftly labelled as Black Wednesday. At the time, current UK prime minister Gordon Brown was in opposition; he made a remark that has subsequently come back to haunt him, proclaiming: "A weak currency is the sign of a weak economy, which is the sign of a weak government."

Subsequently, though, sterling’s devaluation was seen to have proved a benefit for the UK because it helped to increase the country’s competitiveness. A familiar lesson was learnt after the Asian crisis of the 1990s. Now, with the world in an era of relative devalue trading, for every currency seemingly some politicians have realized that it might not necessarily be bad to have a weak currency. The unfortunate result, though, is that they are now playing a game where they blame their countries’ economic woes on an "unfair" exchange rate.

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