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Devaluation refers to a downward adjustment in the official exchange rate of a currency, while revaluation refers to an upward adjustment in the exchange rate. In order to understand why they occur, one first needs to get an idea of the fixed exchange rate concept.
In a fixed exchange rate system, a nation’s domestic currency is fixed to a single major currency such as the U.S. dollar or euro, or is pegged to a basket of currencies. The initial exchange rate is set at a certain level and may be allowed to fluctuate within a certain band, generally a fixed percentage either side of the base rate. The frequency of changes in the fixed exchange rate depends on the nation’s philosophy. Some nations hold the same rate for years, while others may adjust it occasionally to reflect economic fundamentals.
In a fixed exchange rate system, a nation’s domestic currency is fixed to a single major currency such as the U.S. dollar or euro, or is pegged to a basket of currencies. The initial exchange rate is set at a certain level and may be allowed to fluctuate within a certain band, generally a fixed percentage either side of the base rate. The frequency of changes in the fixed exchange rate depends on the nation’s philosophy. Some nations hold the same rate for years, while others may adjust it occasionally to reflect economic fundamentals.