does foreign direct investment affect exchange rate?

Sure, it does because for foreigners to invest in a country they have to convert their currency to that of that country. This means a higher demand for the local currency thus causing it to become stronger,

This is why i always listen to news to be aware of government policy changes before trading a currency. Imagine that the US government enacts a policy to ban foreigners from owning homes in America, such a policy will weaken the US Dollar because it will reduce demand for the dollar.

Yes — foreign direct investment (FDI) can affect a country’s exchange rate, although the impact depends on several factors. Here’s the idea in a clear, teen-friendly way:

✅ How FDI affects the exchange rate

1. FDI increases demand for the domestic currency

When foreign companies invest in a country, they usually need to exchange their own currency for the local currency to:

buy factories or land

pay workers

purchase equipment

This increases demand for the local currency, which can cause it to appreciate (increase in value).

2. FDI can also strengthen confidence in the economy

More investment often signals that a country is stable and growing. Investors may buy more assets there, pushing the currency upward.

3. But FDI isn’t always large enough to move the exchange rate

Trade flows (exports/imports), interest rates, and government policy often have bigger impacts on exchange rates than FDI does.