Overvalued currency

The situation of a currency whose value on the exchange market is higher than is believed to be sustainable.

For example, before the 1994 devaluation in Mexico, prices in Mexico were increasing quite rapidly compared to international prices. That created a situation where imports were cheaper compared to domestically produced goods. As a result, Mexico developed a large trade deficit. In 1994 the Mexican peso depreciated sharply, foreign products became more expensive because of the weaker domestic currency, and the trade deficit was eliminated.