IN FOCUS: 3 of the Biggest Currency Devaluations in History
Continuing the increasing trend of shocking currency developments in recent years, global foreign exchange markets have witnessed some drastic events recently. Venezuela and Turkey, for example, have both dominated the news of late due to their respective currency crises.
Join us in this article as we take a look at three of the most severe currency devaluations in history—as well one to watch out for—and what businesses can learn to protect themselves from risk.
3. The Venezuelan bolivar (VES): 2018
The economic crisis that has engulfed Venezuela since 2013 took a surprising turn in August 2018 as the Maduro government announced a massive 95% devaluation of the currency (see below). It relaunched its currency as the bolívar soberano, replacing the erstwhile bolívar fuerte, and changed its currency code from VEF to VES. The embattled new VES is virtually worthless, with a whole chicken costing 14,600,000 bolivars ($2.22), whereas a single roll of toilet paper will set a customer back 2,600,000 VES.
The oil-rich state was once one of Latin America's most prosperous countries.
To avoid going to the supermarket with a wheelbarrow filled with bolivar notes, many Venezuelans are paying for goods and services via electronic transactions only. The crisis has seen millions of panicked Venezuelans flee the country, with many crossing the border into neighbors Brazil and Colombia, and the International Monetary Fund has forecast inflation of one million % for the end of 2018. The oil-rich state was once one of Latin America's most prosperous countries.
2. The Zimbabwean dollar (ZWD): 2008-2009
Zimbabwe's former currency went from 1,000 ZWD per USD in September 2008 to 300 trillion several months later in February 2009. The hyperinflation led to the Zimbabwe government's promotion of all business in foreign currencies in January 2009, chiefly the U.S. dollar, euro (EUR) and South African rand (ZAR). The government has since proclaimed the "death" of ZWD, and primarily uses USD as the country's currency instead.
Prices doubled every 24 hours at its peak, chronic food shortages were rampant, and unemployment soared.
The economic developments in Zimbabwe impoverished the vast majority of its population of 16 million, which the 2008-09 crisis exacerbated when prices doubled every 24 hours at its peak, chronic food shortages were rampant, and unemployment soared. Commentators have said that under the four-decades of leadership of former president, Robert Mugabe, the main exporting industries were "strangled." The country was once seen as the "bread basket" of Africa.
1. The German mark (DM): 1923
Germany descended into chaos in 1923 as its currency, the mark, quickly devalued. Before World War One (WWI) in 1914, a U.S. dollar w as equivalent to four German marks, increasing to around 70 in 1920.
By November of the same year, one dollar was equal to an eye-watering 4 trillion marks.
In 1923, the country was crippled by the cost of WWI and the subsequent reparation payments it had to pay to other countries. As Germans became increasingly desperate with uprisings occurring across the country, a workers' strike in early 1923 helped set off a spiralling currency devaluation. By November of the same year, one dollar was equal to an eye-watering 4 trillion marks. The crisis saw the introduction of a new currency, the rentenmark, which helped a degree of normalcy to return.
The Currency to Watch
The Chinese Yuan (CNY)
China shellshocked financial markets in 2015 by springing two surprise CNY devaluations in two days to boost Chinese exports after a series of disappointing economic figures. It was China's first devaluation of its currency in two decades. While this devaluation didn't take place in a period of hyperinflation and capital flight like that seen in Venezuela, China's decision must be viewed more broadly.
Subscribe to our
Weekly FX Newsletter
The Asian giant's currency movements have become a source of annoyance for other countries - the United States in particular. Many observers believe that China has sought to gain a competitive edge by manipulating its currency.
Indeed, the 2015 devaluation is thought to be one of the main reasons for the beginning of the current trade war playing out between the U.S. and China. Therefore, while it didn't lead to a huge immediate financial market fallout, the seeds it sowed in 2015 could instigate a global economic downturn should the multi-billion dollar trade war continue to escalate. Should China announce further devaluations—which is more likely if its economy continues to slow down—it could have grim consequences for the global economy.
The takeaway for global businesses
As the markets have shown in recent years, from the Turkish lira to the Venezuelan bolivar, and from crises affecting the Russian rouble and the Brazilian real, company exposure to exotic currencies is ill-advised. Minimizing exposure to countries with exotic home currencies increases risk compared to with the major or minor currencies, irrespective of whether the trading currency is the U.S. dollar or not.
Prudent companies monitor market events by ensuring that they have access to rich real-time foreign exchange data. This data forms the basis from which to make informed strategy decisions. In an increasingly volatile international political, economic and enterprise climate, dedicated market analysis has demonstrated its importance to the continued success of global businesses.