Economic theory on exchange rate forecast

[wtwcws]

According to Schweser: For Portfolio balances and composition: strong economic growth in a country tend to correspond to an increasing share of that economy in global market portfolio. So investors need to be induced to increase their allocation to the currency which weakens the currency and increase the return.

Why this seems contradict relative economic strength where the stronger countries can attract more investors and thus that currency becomes appreciated because ppl need that currency to buy its investment

For first theory.seems strong countries lead to weaker currency while the second theory seems to imply stronger currency

Can anyone advise on this? thanks.

[fino_abama]

@wtwcws

Why this seems contradict relative economic strength where the stronger countries can attract more investors and thus that currency becomes appreciated because ppl need that currency to buy its investment

That part is true. So the more foreign capital flows into the domestic economy, the higher it would push the domestic currency upwards.

@wtwcws

According to Schweser: For Portfolio balances and composition: strong economic growth in a country tend to correspond to an increasing share of that economy in global market portfolio. So investors need to be induced to increase their allocation to the currency which weakens the currency and increase the return.

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 induced”.