Set out the main approaches used to forecast currency movements

Purchasing power parity says exchange rates move to offset inflation differentials; it works poorly short term but anchors long-run fair value. Relative economic strength looks at growth and interest differentials: strong growth and attractive yields draw capital and support the currency. Uncovered interest parity implies higher-yield currencies should depreciate, yet carry trades often profit for long periods before sharp reversals. Capital flows and the savings–investment balance link persistent current account deficits to eventual depreciation. 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. Government intervention matters too. The trap is using one model mechanically; horizon determines which forces dominate.