Causes Of Devaluation And Revaluation

[Tobi]

While devaluation is far more common than revaluation, both occur because the exchange rate has been fixed at an artificially low or high level. This makes it increasingly difficult for the central bank to defend the fixed rate, which in turn attracts the unwanted attention of currency speculators who waste little time in testing the resolve of the central bank to defend the fixed exchange rate. A central bank must have sufficient foreign exchange reserves to be willing to buy all the offered amounts of its currency at the fixed exchange rate. If these forex reserves are insufficient, the bank may have no option but to devalue the currency.