What it is:
How it works (Example):
In countries with fixed exchange rate rates, the central bank (i.e. the country's government) can change the official value of the country's currency relative to a baseline. The baseline may be a foreign currency (e.g. the Euro or the U.S. Dollar) or even the price of a commodity such as gold. In floating exchange rates, such as the U.S. economy, the currency exchange rate appreciates or depreciates according to the market.
For example, if China, which regulates the exchange rate of the yuan to a baseline made up of a "basket" of international currencies, had an exchange rate to the U.S. Dollar of:
1 Chinese Yuan = .14661 U.S. Dollars
...and China revalued its currency, the amount of dollars able to be purchased by the Chinese Yuan would rise, increasing the buying power of the Chinese Yuan.
The International Monetary Fund, aware of the possibility of economic instability caused by revaluations, directed governments to avoid "manipulating exchange rates to gain an unfair competitive advantage over other members."
Why it Matters:
The costs and benefits of stronger or weaker currency exchange rates are an important source of economic debate. In fixed rate economies, revaluation strategies are evaluated in terms of increasing the buying power of the country's currency. At the same time, revaluation can have the effect of weakening countries with strong exports, such as China. For example, a revaluation of the Chinese Yuan would make imports from China more expensive in the U.S., causing the U.S. to seek alternative market sources.