1
$\begingroup$

If a country wants to devalue their countries, why does buying more of a foreign countries currency devalue their currency?

I was reading the top answer from this question How does a country devalue its currency? and it states that buying more of a foreign currency will increase the supply of the yuan. Why and how is that?

$\endgroup$
2
$\begingroup$

Simply because buying country A's currency priced in country B's currency means selling country B's currency.

Simplified but not simplistic example: say that you have 80¥ and want to buy 10€. When buying/demanding these 10€, you will actually simultaneoualy also sell 80¥ i.e. by doing so you become a supplier of (€-priced) yuans. And because selling an asset generally exerts a downward pressure on its price, the price of 1¥ expressed in euros will decrease. Hence the explanation you read.

$\endgroup$
  • $\begingroup$ Any question @ChristopherU ? $\endgroup$ – keepAlive Aug 26 at 20:42
  • $\begingroup$ Could you just quickly explain the last part (And because selling an asset generally exerts a downward pressure on its price, the price of 1¥ expressed in euros will decrease), I don't really get that? Thanks! $\endgroup$ – Christopher Uren Aug 31 at 1:55
  • $\begingroup$ @ChristopherU : 1) If I have 1¥ and that I want to sell it, I have "to find someone" who wants to buy it. It is very likely that I will find someone who will tell me : "I can buy it from you, but sell it cheaper (in euro), otherwise I'll buy it elsewhere". Given that I may not be the only seller on the market, I will accept the transaction price and sell it cheaper than I first expected. 2) By using the word "generally", I mean that I may have found someone who is okay to buy it at the current price without negocation, which will not lead to a decrease in price, not very common though. $\endgroup$ – keepAlive Aug 31 at 20:29
0
$\begingroup$

In easy words it will increase the supply of the currency in the international market and thus devaluation will happen because demand will be same. International market is a free trade economy where currencies value change because of the forces of supply and demand

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.