How does a country’s currency devalue
In: 2
The short and simple answer is people are willing to pay less for it, either in terms of other currencies or in terms of goods or labor. If a company selling widgets has customers in different countries that use different currencies, the company wants to receive roughly the same price/value from all customers for the same product (leaving issues of tariffs, shipping costs, etc. aside). If the company does a lot of business in US dollars, then it can change the pricing of units sold in Euros or CN dollars or any other currency to try to make sure it’s getting more or less the same price for the product/level of work output. Do this on a large scale with lots and lots of companies and individuals, and currencies become acquire relative values compared to each other. This micro made macro effect is strengthened by currency traders who take advantage of small changes in relative valuations, creating more volume in currency that actually changes figurative hands.
Every now and then, something happens that makes companies, traders, etc. doubt that the relative value of a given currency will hold up; that is, whether they’ll be able to continue pricing/trading in said currency close to where they do now and have in the recent past. Could be political upheaval/change, could be abrupt changes in fiscal or monetary policy, could be a freezing of the currency market for one particular currency, etc., and when that happens, the greater uncertainty gets priced in. Given enough doubt about the currency, a downward spiral can happen – people are spooked about a currency becoming worth less so they want a bigger hedge if they’re forced to accept that currency (i.e., they raise prices denominated in that currency compared to other currencies), which makes fewer people want to use that currency to purchase whatever is being sold, which means people holding that currency are willing to trade more of it for less of another currency, which makes that currency worth less, etc., and the cycle repeats and repeats until something changes (like traders finding a “floor” or a government propping up the currency, etc.).
How does a country’s currency devalue
In: 2
The short and simple answer is people are willing to pay less for it, either in terms of other currencies or in terms of goods or labor. If a company selling widgets has customers in different countries that use different currencies, the company wants to receive roughly the same price/value from all customers for the same product (leaving issues of tariffs, shipping costs, etc. aside). If the company does a lot of business in US dollars, then it can change the pricing of units sold in Euros or CN dollars or any other currency to try to make sure it’s getting more or less the same price for the product/level of work output. Do this on a large scale with lots and lots of companies and individuals, and currencies become acquire relative values compared to each other. This micro made macro effect is strengthened by currency traders who take advantage of small changes in relative valuations, creating more volume in currency that actually changes figurative hands.
Every now and then, something happens that makes companies, traders, etc. doubt that the relative value of a given currency will hold up; that is, whether they’ll be able to continue pricing/trading in said currency close to where they do now and have in the recent past. Could be political upheaval/change, could be abrupt changes in fiscal or monetary policy, could be a freezing of the currency market for one particular currency, etc., and when that happens, the greater uncertainty gets priced in. Given enough doubt about the currency, a downward spiral can happen – people are spooked about a currency becoming worth less so they want a bigger hedge if they’re forced to accept that currency (i.e., they raise prices denominated in that currency compared to other currencies), which makes fewer people want to use that currency to purchase whatever is being sold, which means people holding that currency are willing to trade more of it for less of another currency, which makes that currency worth less, etc., and the cycle repeats and repeats until something changes (like traders finding a “floor” or a government propping up the currency, etc.).
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