Portfolio balance and composition impact on currency rate

[Svita]

According to portfolio balance concept “strong economic growth in a country tends to correspond to an increasing share of that country’s currency in the global market portfolio. Investors need to be induced to increase their allocations to that country and currency, which weakens the currency.”

Why does local currency depreciate?

[fino_abama]

See if this helps…

Economic theory on exchange rate forecast

That part is true. So the more foreign capital flows into the domestic economy, the higher it would push the domestic currency upwards. But up to a certain point, the domestic currency becomes too expensive (overvalued) for foreign investors to enter (but they still want to get in). So how can an investor “be induced” to invest into that economy? That would be for the domestic currency to weaken, so it is “cheaper” for foreign investors to invest their funds. Take note of the “need to be ind…

[Svita]

Thank you. It helps. As far as I understood, firstly the lokal currency appreciates because foreign investors invest in the developing countries. When the currency becomes too expensive it depreciates in order to induce the foreign investors to further invest in these countries. However, this is still a strange logic for me because currency appreciates firstly…

[William777]

i noted this too. this make no sense. it is the strong economic growth attract invertors, not the weakened currency.