The Dollar Is at a 20-Year High. That’s Bad News for Bitcoin

The Dollar Is at a 20-Year High. That's Bad News for Bitcoin

Key Takeaways

  • The greenback index has jumped to 20-year highs above 112 due to the Federal Reserve’s financial tightening coverage.
  • While the greenback is hovering, Bitcoin and different cryptocurrencies are struggling because of the Fed’s rate of interest hikes.
  • While the greenback is presently rising in opposition to different currencies, a decline in inflation or an finish to the European vitality disaster might revive curiosity in threat belongings.

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Bitcoin and the broader crypto market are struggling to remain above their June lows as a consequence of renewed energy from the greenback.

BTC Down as DXY Rallies

Bitcoin is battling in opposition to the greenback—and it’s shedding. 

The greenback index (DXY), a monetary instrument that measures the value of the U.S. greenback in opposition to a basket of different currencies, hit a contemporary 20-year excessive Friday, sending different world currencies and threat belongings decrease. DXY, which measures the worth of the greenback in opposition to a basket different currencies, topped 112 earlier this morning. It’s buying and selling at round 112.8 at press time, per TradingView data

The crypto market has been hit notably onerous in current weeks as a consequence of renewed energy of the dollar. In August, Bitcoin loved a transient rally to $25,200 because the greenback retraced from its July highs. However, since then, crypto belongings have been crushed beneath the load of the rising greenback. Bitcoin now seems pinned beneath $20,000 whereas the greenback continues to climb, buying and selling at round $18,810 at press time, per CoinGecko data

DXY (blue) and BTC/USD (orange) chart (Source: TradingView)

Much of the greenback’s optimistic worth motion will be traced again to rising rates of interest from the Federal Reserve. As the Fed raises charges to struggle inflation, it tightens U.S. greenback liquidity. This ought to assist carry inflation again down by making it dearer to borrow cash, thereby lowering demand. However, one aspect impact of such a regime is that it makes the greenback a far more engaging funding. 

The tightening of greenback liquidity means market contributors have much less money to put money into riskier belongings like cryptocurrencies and shares. In flip, this reduces demand, inflicting asset costs to fall. The Federal Reserve has additionally stopped shopping for U.S. Treasury bonds as a part of its tightening coverage. This has precipitated yields on U.S. bonds to rise, which helps the greenback’s worth enhance as extra buyers purchase these bonds.

The Dollar Milkshake Theory

It’s not simply crypto and shares affected by a hovering U.S. greenback. As the Fed began elevating charges to fight inflation earlier than different nations and has been more and more aggressive within the measurement of its hikes, liquidity from the worldwide economic system is flowing into U.S. {dollars} at a file tempo.

This impact was coined the “Dollar Milkshake Theory” by Santiago Capital CEO Brent Johnson. It posits that the greenback will suck up liquidity from different currencies and nations worldwide at any time when the Fed stops printing as a consequence of its place because the world’s reserve foreign money. 

Since the U.S. reserve financial institution turned off its cash printer and began tightening liquidity in March, the Dollar Milkshake Theory seems to be enjoying out. The euro, the foreign money that receives the largest weighting in opposition to the greenback within the DXY, has plummeted all through 2022, not too long ago hitting a new 20-year low of 0.9780 in opposition to the greenback. 

Other world currencies aren’t faring a lot better. The Japanese yen tumbled to a 24-year low Thursday, prompting authorities intervention to assist shore up the foreign money. While the European Central Bank has responded to the weakening euro by elevating rates of interest, the Bank of Japan has thus far refused to take action. This is as a result of it’s actively engaged in Yield Curve Control, protecting rates of interest at -0.1% whereas shopping for a vast quantity of 10-year authorities bonds with a view to preserve the yield at a goal of 0.25%. 

As issues stand, it’s trying more and more troublesome for belongings similar to cryptocurrencies to search out energy amid a deteriorating international economic system. However, there are a number of indicators buyers can look out for that might point out an finish to the greenback’s dominance and its knock-on results. If subsequent month’s Consumer Price Index knowledge registers a notable drop, buyers might flip to riskier belongings within the hope that the Fed will mood its rate of interest hikes. Elsewhere, a decision to the present Russo-Ukrainian War might assist alleviate the worldwide vitality disaster by lowering the price of oil and gasoline. Still, for the time being, the greenback’s rise isn’t displaying any indicators of slowing—and that might preserve crypto trapped close to its yearly lows. 

Disclosure: At the time of scripting this piece, the writer owned ETH, BTC, and a number of other different cryptocurrencies. 

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