1 Huge Reason Stocks Could Rally in 2023
2022 offered up a concoction of negative factors for investors: Inflation was red hot and gradually weakened consumer confidence and spending, Russia's invasion of Ukraine worsened inflation and sent energy prices even higher (not to mention set off a humanitarian crisis), and the U.S. Federal Reserve began its most aggressive interest rate hike cycle to try to bring inflation back down to normal levels.
While the Fed's rate hikes have helped stoke fears of a recession for 2023, it has had an even more dramatic (but little-known) impact on investors in another important way: the sharp rise of the U.S. dollar's value. However, after an incredible run-up in value, the dollar has begun to give back some of its gains in recent months. If the trend holds, this could be a huge tailwind for stocks in 2023. Here's how.
The Fed's interest rate hikes have done far more than throttle economic activity (a blunt instrument used to try to reduce inflation). Interest rates have a direct bearing on demand for a particular currency relative to other currencies. A higher interest rate can increase demand, as investors might be interested in holding "risk-free" cash and short-term debt instruments in dollars, versus a currency where interest rates might be lower. Additionally, the Fed also began lowering the supply of dollars changing hands in the economy last year (known as "quantitative tightening"). Lower supply plus higher demand launched the dollar on an epic run-up in 2022.
Source Fool.com
