A sudden increase in the dollar index after more than 20 years turns out to be immense pain and bad news for many holders of the ultimate digital asset, Bitcoin!
On Friday, the dollar index (DXY), which tracks the value of the U.S. dollar about a basket of other currencies, reached a new 20-year high, driving down the value of other global currencies and risk assets.
The Dollar Index (DXY) rose over 112, indicating that the dollar was strong relative to different currencies. According to TradingView statistics, it is now trading at about 112.8. But is it good news for the digital asset?
Let’s find out as we get into the depths of the Dollar Vs. BTC history in this weblog.
BTC Vs. USD: The History Back & Forth
The former is undoubtedly losing the ongoing face-off between Bitcoin and the dollar. Due to the restored strength of the dollar, the cryptocurrency market has taken a severe beating in recent weeks.
Following the dollar’s retreat from July highs, Bitcoin had a short upswing in August, rising to a high of $25,200. However, the strengthening dollar has demolished the value of crypto assets. As the dollar strengthens, Bitcoin is stuck around $20,000, with prices hovering at $18,810.
The Federal Reserve’s decision to raise interest rates has been a major factor supporting the dollar’s value. Almost everyone was ready to witness the Fed’s third rise in the fund’s rate. However, the increase in the rate by 75 basis points still left many startled.
The efforts to curb inflation by increasing interest rates have reduced the availability of dollars for transactions. Making borrowing money more costly should help reduce demand and, in turn, help bring inflation back down. Yet, the upside of this system is that it boosts the dollar’s appeal as an investment.
Besides the higher interest rates to subside inflation, recent global shocks have severely impacted the dollar’s value, helping it offset the unexpected rise in the last two decades. The turmoil between Ukraine and Russia was one of the reasons that assisted the U.S. dollar in significantly boosting its value.
However, as the supply of dollars dwindles, investors have less disposable income to make riskier investments like stocks and cryptocurrencies. Demand drops, and asset values go down as a result.
The Dollar Milkshake Theory: Everything That Could Be Following Next
A rising U.S. dollar is bad news for more than just cryptocurrencies and equities. Liquidity from across the world is flooding into U.S. dollars at a historic pace because the Federal Reserve began raising rates to battle inflation ahead of other countries and has been more aggressive in the scale of its rises.
The dollar is undoubtedly stronger compared to other currencies. Since it is the world’s reserve currency, it is assumed that when the Federal Reserve stops printing, the dollar will absorb liquidity from other currencies and governments throughout the globe. Brent Johnson, CEO of Santiago Capital, named this phenomenon the “Dollar Milkshake Theory.”
Along with other measures of its tightening policy, the Federal Reserve has ceased purchasing U.S. Treasury bonds. The result has been a spike in bond rates for U.S. government debt, which has encouraged more investors to acquire dollars. The central banks of other countries, like Europe and Japan, purchase government bonds, keeping their yields low and exposed to inflation, causing the currency to weaken against the dollar.
Throughout 2022, the DXY’s most heavily weighted currency, the euro, has fallen to fresh 20-year lows versus the dollar, most recently falling to 0.9780.
The situation is similar for other global currencies. The yen’s value hit a new 24-year low, forcing the Japanese government to step in and try to stabilize the currency. The European Central Bank has raised interest rates in response to the falling value of the euro, while the Bank of Japan has resisted doing the same.
In a nutshell, when a dollar rises against other currencies, this chain of events pushes it even higher, adversely impacting the emerging markets of digital assets.
What’s Next For Bitcoin?
The current state of the global economy makes it unlikely that volatile assets like cryptocurrencies would be able to maintain their value. However, there are a few telltale indicators that the dollar’s hegemonic position and its domino consequences may end. Investors may seek riskier investments in the next month if the Consumer Price Index (CPI) shows a significant decline in the coming month.
The drop in the value of the U.S. dollar fueled a rise in stocks and digital assets, especially Bitcoin, in the last week. Bitcoin geared up approximately 13% to $21,375.38 for the first time since late August. The U.S. dollar stood at around 108.36, the weakest in more than a week.
The U.S. Dollar Index, which tracks the dollar’s value relative to a group of six major currencies, has risen by almost 20% over the last year to levels not seen in over two decades. Bitcoin (BTC) lost over half its value in that period, falling by 58%.
There is a correlation between rising interest rates and dollars. When the rate is high in the U.S., the rates across the fixed income securities also go up. With higher interest than other countries, these yields captivate lenders globally to make foreign investments. Investors mostly begin to sell their investments denominated in their currency in exchange for U.S. dollars, increasing the value and demand for dollars. Higher interest rates directly affect the respective country’s currency value.
Embrace The Rough Bump
Overall, Bitcoin performed far worse than stocks in the week after the CPI data was released. A strong dollar implies a downturn in the prices of cryptos. Therefore, this rampage of higher interest rates must be ceased if Bitcoin wants to take a sustained upside leap. The Federal Reserve will have to stop its current action to reverse the market situation.
However, it is vital to remember that it is not only the U.S. dollar’s value impacting its performance. The digital asset possesses factors behind price fluctuations and idiosyncrasies. Moreover, cryptocurrencies are risky and volatile assets, and their price often increases depending on the market’s condition and attitude toward risk. For instance, when the dollar index barely shifted from 92.7 to 95 in late 2021, Bitcoin’s all-time trading high was approximately $69,000.
