An argument amongst monetarists is whether or not currency devaluations are
productive. Some economists believe devaluation can cause great inflationary pressures. First, I would like to give a brief overview of the concept of devaluing of the dollar. One important note is that all currencies at some point have been devalued at one time or another. When a country imports more than it exports, there will be pressure on that country's currency to devalue. However, if the trade deficit is offset by inflows of capital( for investment purposes), the country can continue to run the trade deficit without having to devalue. When a government devalues its currency, it is often because the interaction of market forces and policy decisions has made the currency's fixed exchange rate weak. In order to nourish a fixed exchange rate, a country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all offers of its currency at the established exchange rate. When a country is unable or unwilling to do so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange reserves.
There are other policy issues that might guide a country to change its fixed exchange rate. For example, rather than implementing unpopular fiscal spending policies, a government might try to use devaluation to boost aggregate demand in the economy in an effort to fight unemployment.
If observers believe that the government will not be able to defend it's currency, they may very well attempt to profit from the devaluation. There is very little risk when trying to profit from a currency devaluing. The most that is likely to be lost is the mere transaction costs. If an observer is right, ...