There must, of course, be a level where these expectations will reverse. However, if that level, because of “momentum” trading in imperfect and thin markets happens to be significantly out of line with “fundamentals”, considerable instability and substantial overvaluation (or under valuation) may result. Such an outcome may do more harm than good to continued confidence in a country’s exchange rate system.
The third suggestion to hold the rates at current levels, and not to allow it to appreciate any further, even if inflows are strong, is also likely to be unsustainable over any length of time. It virtually amounts to adopting a “fixed” or a near-fixed exchange rate system with a floor.