Competitive Devaluation

Competitive devaluation is the key weapon in a currency war. The currency devaluation of one country is matched by the currency devaluation of another country in a kind of “race to the bottom,” with both countries seeking to make their currency really cheap, hoping that outside countries will buy their currency and then use it to buy lumber or coal or whatever product the “winner” makes.

Each is trying to make their goods and services more attractive to the outside world. More attractive, as in...cheaper.

Devaluing currency may help a country’s depressed export market, but it increases the cost of goods coming into the country. Therefore, devaluing currency has a "big picture" impact as well. It essentially isolates the devalued currency company, leaving it unable to buy goods from others.

Competitive devaluation is most common in countries that have a managed exchange rate versus a floating exchange rate that is determined by market forces. Mangoes and other produce are exported at a discount, but cars come in at a higher price because of the devaluation.