How can a country devalue its own currency?Wht are the negative effects of devaluation?

I have heard that China has devalued its currency to make the Yuan more competitive aganist the dollar.Now India is also devaluing its rupee.Wht are the negative effects of this to India or China to how much extend can they devalue.|||Just like any other product, the value of a currency goes up and down based on supply %26amp; demand.





If you want to know more about how currencies are valued, you can refer to a previous answer I posted at: http://answers.yahoo.com/question/index;鈥?/a>





So basically, a country can devalue its own currency by selling/releasing more of it into the world. It can do this in many ways, including just printing cash and dumping it onto the foreign exchange market. It can allow more imports into the country or put taxes on exports, forcing consumers to purchase foreign products with their cash - hence increasing the supply of their currency abroad. It can do any number of things to increase the amount of its currency abroad and devalue it.





In the case of China, the government can decide to sell its currency to the public for less than its actually worth.





This gives a very good deal for people who can buy Chinese Yuan and pay for products priced in it.








The problem is, by encouraging a country to export the goods it produces, there potentially becomes fewer goods available at home - making prices more expensive (although doesn't seem to be the case in China). Also, it makes it more expensive to import goods. This can help protect domestic companies from foreign competition... which may make them less efficient. By not exposing domestic companies to foreign competition, prices can remain higher, and quality can remain lower. The lack of price competition can mean inflation for the country that's doing the devaluing.





Since foreigners are getting a good deal on things priced in cheaper money, investors often pour their cash into the country. Because the government of the country wants to control the value of the currency, they usually put major restrictions on letting people trade currency or having currency leave the country (these restrictions are called "capital controls"). Basically what happens, with all that extra cash coming into the country, prices go up even more.





So overall, everything from the lack of competition, to the potential over-exporting, to the massive influxes of money, to making foreign products expensive... all this can make devaluing currency very inflationary - so it comes at a cost. But basically it can be done by a government selling more currency on the foreign exchange market... or just by selling it at a lower price than it's actually worth.





I hope this helps!|||As you know, international trade and finance is a two way street. Devaluation is often done by nations to give their products and services a relatively more competitive price edge in the international marketplace.





However, it can have the following consequences





1) Many imports can become more expensive for the country. This can negatively affect countries that import major raw materials/resources such as energy (petroleum is priced in USD), or industries that rely on a lot of imported inputs or capital equipment. This may adversely affect a industry that has to import a lot of content to make their products and yet their per unit price is less when priced in hard currency - they get squeezed with higher costs and relatively lower unit pricing for export.





2) If the country has a lot of foreign loans, they could see their debt and cost of servicing that debt go up.





Thus, devaluation or appreciation of currency is not something that a country can take lightly. IIRC, China is appreciating its currency vs. the dollar slightly, rather than the other way around (the US has been putting pressure on China to do that).|||A country can try to set the price of the currency wherever they want. The reason for having a low value is to increase exports. Both China and India are trying to grow the economy through exports. Keeping thier currencies low by comparison to the dollar or euro makes exports from China or India cheaper in terms of the dollar or euro.


The downside, is that it makes imports more expensive, and reduces investment.