Key Takeaways
- Government raises currency value in fixed systems.
- Makes imports cheaper but exports more expensive.
- Adjusts asset values and combats inflation.
What is Revaluation?
Revaluation is a deliberate upward adjustment of a country's currency value by its government or central bank, typically within fixed or pegged exchange rate systems. This process strengthens the currency relative to other currencies or a set baseline, impacting trade and economic balances.
Unlike natural currency appreciation, revaluation is an official policy action designed to address economic issues such as inflation or trade imbalances, often influencing macroeconomics at a national level.
Key Characteristics
Revaluation involves several distinct features that affect economies and markets:
- Official Adjustment: It is a government or central bank decision to increase currency value, unlike market-driven appreciation.
- Fixed or Pegged Rates: Applies mostly in systems with stable exchange rates, where the currency is tied to another currency or asset.
- Impact on Trade: Makes imports cheaper and exports more expensive, influencing trade balances.
- Asset Valuation: Affects the value of foreign-denominated assets and liabilities, requiring companies to revalue holdings accurately.
- Economic Policy Tool: Used to control inflation or correct undervaluation, but may provoke political pressure from exporters.
How It Works
Revaluation starts by establishing a new official exchange rate that increases the currency's value against the baseline, such as the US dollar or gold. Central banks enforce this rate through interventions in the foreign exchange market, adjusting reserves and currency supply.
For example, a currency pegged at 10 units per USD might be revalued to 9.9 units per USD, making the local currency stronger. Companies then update their financial statements by revaluing foreign assets at spot rates to reflect accurate valuations, which can affect obligations and reported earnings.
Examples and Use Cases
Revaluation impacts various sectors and countries, with notable examples illustrating its effects:
- Swiss Franc 2015: When the Swiss National Bank removed its EUR peg, the franc sharply appreciated, affecting exporters and investors holding franc assets.
- Airlines: Companies like Delta face challenges when currency revaluation raises costs for foreign operations or fuel imports, influencing their financial strategies.
- Energy Sector: Firms in the energy industry may experience shifts in asset values and international contracts due to currency revaluation impacts.
Important Considerations
When dealing with revaluation, consider its mixed effects: while it helps control inflation and benefits importers, it can hurt exporters by making their goods less competitive internationally. Understanding these trade-offs is vital for businesses and policymakers alike.
Additionally, revaluation can influence corporate financial reporting and obligations, requiring vigilance in managing currency risk. Staying informed about global economic forums like the G-20 can provide insight into potential currency policy shifts.
Final Words
Revaluation strengthens a currency to address economic imbalances but can complicate export competitiveness. Monitor how these shifts affect your trade exposure and consider consulting a financial advisor to adjust your strategy accordingly.
Frequently Asked Questions
Revaluation is a deliberate upward adjustment by a government or central bank to increase the value of a country's currency relative to other currencies or a baseline, usually in fixed or pegged exchange rate systems.
Revaluation is a government-led increase in currency value, contrasting with devaluation, which lowers the currency's value. Appreciation happens naturally in floating exchange rate systems without direct government intervention.
Countries revalue their currency to address economic imbalances like trade surpluses, inflation, or undervaluation. It helps curb inflation by making imports cheaper and can be triggered by balance of payments pressures or political factors.
Revaluation makes imports cheaper, which can reduce inflation, but it also makes exports more expensive and less competitive abroad, potentially slowing growth in export-driven sectors.
Foreign-held assets in the revalued currency increase in value, while domestic assets denominated in foreign currencies may lose worth. Companies need to adjust their financial statements to reflect these changes accurately.
Central banks set and maintain an official exchange rate by buying or selling foreign currency. To revalue, they announce a new, stronger rate and use market interventions or policy changes to enforce the adjustment.
In 2015, the Swiss National Bank abandoned its peg to the euro, causing the Swiss Franc to appreciate about 30% overnight. This sudden revaluation significantly increased the value of CHF holdings.
Revaluation is mainly used in fixed or pegged exchange rate systems and is rare under floating rates, where currency values fluctuate naturally. However, it can still occur in currency unions during crises.
