Weakening Currency from Higher Demand - Reading 11

[Thammer]

“In the long run, the relative size of each currency portfolio depends primarily on relative trend growth rates and current account balances. Rapid economic growth is almost certain to be accompanied by an expanding share of the global market portfolio being denominated in the associated currency. Thus, investors will have to be induced to increase their strategic allocations to assets in that country/currency. All else the same, this would tend to weaken that currency—partially offsetting the increase in the currency’s share of the global portfolio—and upward pressure on risk premiums in that market. However, there are several mitigating factors”

Why does this weaken the currency? I would thought increased demand for Assets in a currency would strengthen that currency? What am I missing here?

[FinancialWar]

which provider is that passage from? couldn’t find it in Schweser Notes or CFAI official curriculum.

[Thammer]

Thanks for the reply. It is from the CFAI text. Reading 11, section 6.2.3.

[fino_abama]

Hope 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…

[Thammer]

Helpful. Thanks. I guess I was thinking of the initial reaction in the currency and not the secondary. It makes sense, thank you.