2023: Economic Myths & Facts

Is inflation rising or falling? What about interest rates and their potential effect on the strength of the US dollar (USD)? And what are the potential opportunities, if any, for investors? Those questions and related topics are the subject of numerous economic myths, misconceptions, and outright falsehoods. It’s best to set the record straight and get some solid answers to these vital questions of the day.

Inflation is Soaring

It’s abating as the US Fed increases interest rates. Inflation is like a poison to the strength of the USD, but recent news has appeared to support the domestic currency. That’s because, after reaching a peak of 9% in the middle of 2022, the rate of general price increases began to drop back. Possibly a direct reaction to the Fed’s string of interest rate hikes and a dozen other factors, the good news for the dollar is that inflationary pressures are weakening significantly.

After six monthly drops in a row, the inflation rate could easily continue falling through the first two quarters of 2023. If that happens, look for the dollar’s strength to pick up serious momentum. Risks for forex traders who bank on the domestic currency is that multiple other factors could cause it to weaken just as quickly. But the long-term opportunity for potential improvement exists. Visit your broker’s MT5 download page and use the platform to get involved on whichever side of the dollar’s moves you think are more likely to happen.

Interest Rates Won’t Help or Hurt the Dollar

Rates play a central role in supporting or weakening the US currency’s strength. Throughout recent history, whenever the US Federal Reserve Board (Fed) raises interest rates, the dollar gets a bump in value. That’s primarily because foreign investors tend to seek out dollars that come with higher interest rates, relatively speaking. When the Fed ups rates, as they did in December 2022, the domestic currency automatically becomes that much more attractive to outsiders. But even when there’s no immediate effect from the Fed’s actions, higher rates can dampen inflationary pressures and make the entire economy stronger in the long run.

For investors, knowing the direction the value of USD is likely to move can inform all sorts of buying and selling decisions. Forex traders who believe the USD is about to rise could use that information to pair it with a potentially weak currency and speculate on the difference. Even if the dollar’s strength is expected to weaken, savvy forex enthusiasts might short the USD against a relatively stronger currency.

A Volatile Economy Hurts Everyone Equally

Many traders and investors maintain financial health and even profit during bad times. Volatility has a way of spooking many investing and trading devotees. Some sit on the sidelines for years waiting for ideal conditions, which rarely last for more than a short time. Others move their assets into safe haven asset classes like gold and real estate. But the myth that volatility, in and of itself, is a bad thing for investors is incorrect. 

In fact, there are large numbers of part-time investors who thrive on changing prices and view such scenarios as a chance to earn outsize profits in short periods of time. In bear markets, like the current one, where the general level of equity values is headed downward, there are several tactics for earning a profit. In addition to shorting stocks, millions of people choose to speculate on falling price levels by using forex currency pairs, CFDs (contracts for difference), or options.

Securities Markets are Recovering

Most Global Equities Indices are Extremely Bearish. While not all of the global securities indices have traveled in tandem for the past five years, several of the leading ones have shown a similar trend line. The S&P 500, FTSE, and NIKKEI all enjoyed a relatively upward momentum from early 2018 until late 2022, with temporary down spikes at the onset of the COVID pandemic. This is particularly true for the S&P, which many consider an international benchmark of how the global equities sector is performing.

Then, during Q1 of 2022, the long downward trajectory began. Some viewed it as a culmination and late effect of the COVID economic contraction that began in 2020. It is possible that the pandemic didn’t have a strong effect on stocks for about two years, but once the fall began, it did not stop. With only brief pauses in August and November, the general direction was down, down, down. If inflation continues and the war in Ukraine does not end soon, it’s very likely that the German DAX, British FTSE, Japanese NIKKEI, and the US S&P 500 will all fall precipitously during the first six months of 2023.

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