Revaluation refers to deliberately exerting an upward pressure on the prices of goods, assets and even currencies. In accounts, revaluation may refer to readjustments made to the prices of commodities and assets. For a central bank, revaluation refers to applying an upward pressure to the exchange rate.
Countries that maintain a fixed exchange rate can adjust the value of their currency against a baseline. This baseline can be another currency or the value of a commodity like gold. Revaluation can be understood as the opposite of devaluation, wherein countries deliberately decrease the value of their domestic currency against the baseline.
Revaluation and devaluation cannot occur in a floating exchange rate system where the exchange rate is determined by market forces. In a floating exchange rate system, there is minimal to no intervention by the government or central bank of a country in increasing or decreasing the value of their currency.
If the exchange rate of Country A is maintained at 10:1, then the home country can simply announce that the value of the domestic currency will be revalued to 2:1. This would increase the value of the domestic currency. Further, if the central bank announces that the exchange rates are being maintained at 12:1, then this is called devaluation.
Countries may also choose to revalue their currency by changing the supply of foreign currency reserves in their country. Changing the supply of foreign currency affects the exchange rate.
Consider the following example depicting the exchange rate determination of Dollar in terms of Euro. The supply of Euro is the quantity of Euro available as foreign exchange with the US, while the demand for Euro reflects its demand in the US. Here, Dollar is the domestic currency and Euro is the foreign currency.
In the above diagram, the supply of Euro in the economy is increasing, while the demand for Euro remains the same. As more units of Euro are kept as foreign exchange, Euro depreciates while Dollar appreciates. This is how countries can influence the value of the currency by changing the supply of foreign exchange reserves.
If the exchange rate of country A is maintained at 7:1, then it can be said that 7 units of domestic currency are required to get one unit of foreign currency. However, when the exchange rate is revalued to 5:1 then it means that now only 5 units of domestic currency are required to get one more unit of the foreign currency.
This means that the foreign currency has lost its value as it has become cheaper, while the domestic currency has gained value as it is more expensive. Lesser units of domestic currency must be foregone to get the same amount of foreign currency.
A revaluation would impact the domestic currency in the following ways: