Revaluation: Definition, Causes, and Economic Effects

What is a revaluation?

A revaluation is an upward adjustment of a country’s official exchange rate in a fixed-exchange-rate system. It raises the domestic currency’s value relative to a benchmark (another currency, a basket of currencies, gold, or wages). Revaluation is the opposite of devaluation, which lowers the official exchange rate.

Fixed vs. floating exchange rates

• Fixed exchange rate: The government or central bank sets the official rate. Only policy action can revalue or devalue the currency.
• Floating exchange rate: Market forces determine the rate; it fluctuates continuously and cannot be “revalued” by policy in the same administrative sense.

Historical examples

• The U.S. shifted from a fixed (gold-linked) system to a floating exchange rate in 1973.
• China revalued its currency in 2005, moving from a strict peg to the U.S. dollar to a peg against a basket of world currencies.

How revaluation affects exchange rates, trade, and the economy

• Stronger currency: Revaluation raises the domestic currency’s purchasing power against foreign currencies.
• Imports become cheaper: Domestic consumers and businesses pay less in local currency for foreign goods and services.
• Exports become more expensive: Foreign buyers face higher prices for goods priced in the revalued currency, which can reduce export volumes and hurt export-oriented industries.
• Trade balance: Cheaper imports and pricier exports tend to widen the trade deficit unless export competitiveness improves elsewhere.
• Domestic inflation: Cheaper imported goods can reduce imported inflation, but weaker export demand may slow economic growth and employment in export sectors.

Effect on asset valuation

Revaluation changes the home-currency value of assets denominated in the revalued currency. When the foreign currency strengthens, assets and liabilities expressed in that currency increase in value when converted to the home currency.

Example:
* Before revaluation: 10 foreign currency units = $1. An asset of 1,000,000 foreign units = $100,000.
* After revaluation: 5 foreign currency units = $1 (foreign currency doubled in value). The same 1,000,000 foreign units now convert to $200,000.
Companies with foreign operations or holdings must revalue book values to reflect the new rates, affecting reported earnings and balance sheets.

Common causes of revaluation

• Policy decision in a fixed-rate system: Central bank or government action to change the official rate.
• Interest rate differentials: Higher domestic interest rates can attract capital, strengthening the currency.
• Improved economic fundamentals: Strong growth, rising productivity, or better fiscal positions can boost currency demand.
• Changes in benchmark or peg: Shifting the peg to a different currency or basket can alter relative value.
• Speculation and market sentiment: Anticipation of policy shifts or economic events can create pressure for an official adjustment.
• Political or large-scale events: Leadership changes or major geopolitical developments can trigger revaluation if they alter perceived stability or competitiveness.

Is revaluation good or bad?

It depends on perspective and economic context:
* Pros:
– Reduces the cost of imports and imported inflation.
– Increases purchasing power for consumers and businesses that rely on foreign inputs.
– Can signal confidence in the economy.
* Cons:
– Makes exports less competitive, potentially reducing export volumes, profits, and employment in export sectors.
– Can create winners and losers across industries and trading partners.
Net effects hinge on the economy’s structure, reliance on exports, and monetary/fiscal conditions.

How a country can strengthen its currency

• Direct intervention: Central bank purchases domestic currency using foreign reserves.
• Monetary policy: Raising interest rates to attract foreign capital.
• Reduce inflation: Lower inflation preserves or increases real currency value.
• Supply-side reforms: Improve competitiveness through productivity gains, deregulation, or investment incentives.
• Fiscal discipline: Lower deficits and debt can improve investor confidence.

Key takeaways

• Revaluation is an upward administrative adjustment of a currency’s official value in a fixed-rate system.
• It lowers import costs but can hurt exporters by making their goods more expensive abroad.
• Revaluation affects balance sheets and reported values of foreign-denominated assets and liabilities.
• Causes include policy decisions, interest-rate shifts, economic fundamentals, speculation, and major events.
• Whether revaluation is beneficial depends on the country’s economic priorities and exposure to international trade.

Understanding revaluation is important for policymakers, exporters and importers, multinational companies, and investors with foreign-currency exposure.