under-valued currency

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A currency whose exchange rates with other currencies are lower than is necessary for external balance. This tends to improve the country's balance of payments on current account, as relatively low prices make exports easy to sell and imports easy to compete with. It should also make it possible to borrow easily, if the market expects the exchange rate to rise. It is not easy to judge whether a currency is under-valued: for example, the current account may be in surplus during a recession even though the exchange rate is too high to be consistent with external balance once activity recovers.

Subjects: Economics.

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