What Is a Revaluation?
A revaluation is a calculated upward adjustment to a country’s official exchange rate relative to a chosen baseline. The baseline can include wage rates, the price of gold, or a foreign currency.
Revaluation is the opposite of devaluation, which is a downward adjustment of a country’s official exchange rate.
A revaluation is a calculated upward adjustment to a country’s official exchange rate relative to a chosen baseline, such as wage rates, the price of gold, or a foreign currency.
In a fixed exchange rate regime, only a country’s government, such as its central bank, can change the official value of the currency.
Understanding a Revaluation
In a fixed exchange rate regime, only a decision by a country’s government, such as its central bank, can alter the official value of the currency. Developing economies are more likely to use a fixed-rate system in order to limit speculation and provide a stable system. A floating rate is the opposite of a fixed rate. In a floating rate environment, revaluation can occur on a regular basis, as seen by the observable fluctuations in the foreign currency market and the associated exchange rates.
The U.S. had a fixed exchange rate until 1973 when President Richard Nixon removed the United States from the gold standard and introduced a floating rate system. Although China has an advanced economy, it’s currency has been fixed since 1994. Before the Chinese government revalued its currency, the yuan, in 2004, it was pegged to the U.S. dollar. After revaluation, it was pegged to a basket of world currencies.
Revaluations affect both the currency being examined and the valuation of assets held by foreign companies in that particular currency. Since a revaluation has the potential to change the exchange rate between two countries and their respective currencies, the book values of foreign-held assets may have to be adjusted to reflect the impact of the change in the exchange rate.
For example, suppose a foreign government has set 10 units of its currency equal to $1 in U.S. currency. To revalue, the government might change the rate to five units per dollar. This results in its currency being twice as expensive when compared to U.S. dollars than it was previously. If the aforementioned currency revaluation occurred, any assets held by a U.S. company in the foreign economy need to be revalued. If the asset, held in foreign currency, was previously valued at $100,000 based on the old exchange rate, the revaluation would require its value to be changed to $200,000. This change reflects the new value of the foreign asset, in the home currency, by adjusting for the revaluation of the currency involved.
Causes of Revaluation
Currency revaluation can be triggered by a variety of events. Some of the more common causes include changes in the interest rates between various countries and large-scale events that affect the overall profitability, or competitiveness, of an economy. Changes in leadership can also cause fluctuations because they may signal a change in a particular market’s stability.
Speculative demand can also affect the value of a currency. For example, in 2016, prior to the vote determining if Britain would remain part of the European Union (EU), speculation caused fluctuations in the value of multiple currencies, including the U.S. dollar and the Chinese yuan. Since it was not yet known at that time whether or not Britain would remain part of the EU, any action taken because of this possibility was considered speculative in nature.