Navigating Devaluation
Understanding why currencies lose value against the dollar and how to protect yourself.
What is Currency Devaluation?
When a currency devalues, it means you need more units of that currency to buy one dollar (USD). It’s a loss of purchasing power against the world’s main reserve currency, affecting everything from import prices to the value of your savings.
Metaphor: The Leaky Glass
Imagine your currency is a glass of water, representing its purchasing power. Factors like inflation or deficits are leaks that empty the glass. Even if the glass (bill) is the same, it holds less value.
Metaphor: The Car on the Hill
Think of your currency as a car trying to climb the “dollar hill.” If the hill gets steeper (the dollar strengthens), your car (currency) needs more effort (more units) to reach the same point (1 USD).
What Drives Devaluation?
A sharp fall is no accident. It’s a cocktail of macroeconomic factors. Confidence is key, and when it’s lost, capital flees, accelerating the fall.
Internal Inflation
High prices erode purchasing power.
Deficits
Spending more than is earned increases demand for USD.
Interest Rates
If the Fed pays more, capital flows to the USD.
Capital Flight
Lack of confidence makes investors flee.
DEVALUATION
Ranking: The Hardest Falls (2022-2024)
Several currencies have suffered extreme depreciations. This chart compares some of the most significant recently reported value losses against the USD.
Case Studies: A Closer Look
Let’s analyze three emblematic cases that illustrate the speed and scale of devaluation.
Case 1: The Argentine Peso (ARS)
Argentina has faced chronic inflation and fiscal deficits, resulting in constant devaluation. In late 2023, an official devaluation of over 50% was enacted to correct imbalances, causing the exchange rate to spike.
Case 2: The Lebanese Pound (LBP)
After a financial and banking collapse, the LBP lost an astonishing amount of value. In 2023, the currency lost ~89.9% of its value, and the central bank devalued the official exchange rate by 90%.
Case 3: The Ethiopian Birr (ETB)
In a move to liberalize the economy amidst a currency shortage, Ethiopia allowed the birr to float in July 2024.
Fall in a single day
Following the central bank’s decision to float the currency.
The Domino Effect: Impacts on You and Businesses
The effect is not just numerical; it changes daily life, costs, and the value of labor.
👤 Impacts for Individuals
- More expensive imports: Technology, medicine, and goods become prohibitive.
- Diluted salaries: The purchasing power of your salary plummets in USD terms.
- Debts in USD: If you have debts in dollars, they become much harder to pay with local income.
- Loss of wealth: Savings in local currency lose their international value.
💼 Impacts for Businesses
- Production costs: Imported inputs skyrocket, fueling inflation.
- Competitiveness (mixed): Exports can become cheaper, but only if inputs are not dollarized.
- Debt risk: Corporate debt in foreign currency becomes an existential threat.
- Uncertainty: Extreme volatility makes strategic planning nearly impossible.
Building a Shield: How to Protect Yourself
You are not powerless against devaluation. Being an “informed investor” allows you to take proactive steps to protect your wealth.
1. Diversify Your Assets
Don’t keep all your assets in local currency. Consider holding a portion in strong currencies (like USD), precious metals, or real estate that holds its value.
2. Monitor Key Indicators
Watch inflation, the country’s international reserves, the fiscal deficit, and the real exchange rate. These are the early “warning signs.”
3. Use Adjusted Instruments
Look for bonds or deposits that are indexed to inflation or denominated in foreign currency, if they are available and secure.
4. Evaluate Income vs. Costs
If your income is in local currency but your debts or essential costs (rent, loans) are in USD, you are in a vulnerable position. Try to align your currencies.
5. Stay Alert to Announcements
If a central bank announces it will “float” the currency or remove controls, prepare for extreme volatility and an abrupt adjustment, as seen in Ethiopia.
Final Thought
A proactive approach is like a parachute: it’s better to have it and not need it, than to need it and not have it.