Portfolio balance approach
A view of exchange rates in which investors hold a country's assets only at the right expected return. Persistent fiscal deficits add to their supply, so the currency eventually weakens or yields must rise.
Where you will meet it
Portfolio balance approach appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain what fiscal and monetary policy may do to exchange rates
“The portfolio balance approach adds that persistent fiscal deficits can weaken a currency over time, if investors demand a lower price or higher return to hold the growing debt.”
- Set out the main approaches used to forecast currency movements
“The portfolio balance approach says investors demand higher returns to hold growing stocks of a country's assets, so rising government debt can weaken the currency.”
Practise it
Practise portfolio balance approach until it is automatic: questions that explain every wrong option.
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