When there is an investment opportunity in a country and there is capital flowing towards that country then there will be conversions into that country’s local currency -> this will lead to an increase in demand for that country’s currency -> then why does the write up mention that this SAA would weaken the local currency? Please explain.
Have some understanding of the text, would just like to get this clarified; Talking of reserve currencies like the USD this portion of the text says that if these countries with reserve currencies have a deficit then they would help increase liquidity in the economy;
My Understanding:
When a country like the US has a fiscal deficit -> capital inflows to the US would increase -> this in turn would increase the demand of USD and hence help increase the liquidity of USD in the market.
Please review the above stated understanding of the text, if the same is incorrect kindly rectify.
Thank you.
Thanks a lot for the audio, very well explained indeed π
Just one clarification, so in the 1st paragraph, one has to think from the point of view of the current account balance and the growth rate of the economy, if right now the growth rate is exceptionally high the economy seems to be a good investment and so there is Hot Money Inflow. But if the growth rate is not sustainable then over the long run there will be a depreciation in the value of the currency.