Capital flows drive foreign exchange market dynamics from "summary" of International Money and Finance by Michael Melvin
Capital flows play a critical role in determining the exchange rate of a country's currency in the foreign exchange market. These flows consist of investments and transactions involving financial assets moving in and out of a country. When capital flows into a country, it increases the demand for that country's currency, leading to an appreciation of the exchange rate. Conversely, when capital flows out of a country, it reduces the demand for the currency, causing depreciation. The dynamics of the foreign exchange market are heavily influenced by capital flows as they reflect the confidence of investors in a country's economy. For instance, if foreign investors believe that a country's economy is strong and offers attractive investment opportunities, they are more ...
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