Capital Account Flows - Confirm my Understanding

CFA Level II Economics
#1

Hi All -

Doing some review of Economics again…can someone explain/confirm this concept to me: “As Capital flows into a country, demand for that country’s currency increases, resulting in appreciation”.

My understanding: as capital flows into the Country, the investor(s) must convert their foreign currency into the domestic currency, which increases demand for the domestic currency, and therefore the increased demand for the domestic currency (all else equal) leads to appreciation?

Thank you

#2

Hi,

your explanation is correct. The investor buys the domestic currency and sells the foreign currency leading to appreciation of the domestic currency (all else equal, e.g. money supply).

Regards,

Oscar