- September 27, 2023
- Posted by: [email protected]
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Investor apprehensions regarding the U.S. dollar’s influence on Bitcoin may be somewhat exaggerated, especially when considering the broader, long-term perspective. On September 22, the Dollar Strength Index (DXY) reached its highest point in almost a decade, reflecting increasing confidence in the United States dollar vis-à-vis other major fiat currencies like the British pound, euro, Japanese yen, and Swiss franc.
While this surge in demand for the greenback has raised concerns about its potential impact on Bitcoin and cryptocurrencies, it’s essential to clarify that these concerns may not be intrinsically connected. The DXY recently confirmed a “golden cross” pattern, signifying the moment when the 50-day moving average surpasses the longer 200-day moving average. This pattern is often viewed as a precursor to a bull market by technical analysts.
However, it’s crucial to recognize that historical trends aren’t solely determined by price patterns. In September, the U.S. dollar exhibited resilience, even amid concerns about inflation and the economic outlook of the world’s largest economy. Predictions for U.S. gross domestic product (GDP) growth in 2024 currently stand at a modest 1.3%, significantly lower than the 2.4% average rate witnessed over the preceding four years. This slowdown can be attributed to various factors, including tighter monetary policy, rising interest rates, and the waning effect of fiscal stimulus measures.
Nevertheless, not every uptick in the DXY reflects heightened confidence in the U.S. Federal Reserve’s economic policies. For instance, if investors choose to sell U.S. Treasurys and hold cash, it suggests an impending recession or a notable uptick in inflation as the most likely scenarios.
With the current inflation rate at 3.7% and climbing, there’s little motivation to settle for a 4.4% yield. Consequently, investors are demanding a 4.62% annual return on five-year U.S. Treasurys as of September 19, marking the highest level in over a decade. This data unequivocally indicates that investors are steering clear of government bonds in favor of the safety of cash positions, even though it may seem counterintuitive at first. This approach aligns with their strategy of waiting for a more favorable entry point.
Investors anticipate that the Fed will persist in raising interest rates, which would enable them to capture higher yields down the road. If confidence in the Fed’s ability to curb inflation without causing substantial economic harm falters, it could disrupt the assumed correlation between a stronger DXY and reduced demand for Bitcoin. While there’s a reduced appetite for risk-on assets, exemplified by the S&P 500’s negative performance of 4.3% in September, investors are cognizant that hoarding cash, even in money market funds, doesn’t guarantee stable purchasing power.
As the government continues to raise the debt ceiling, investors face dilution, rendering nominal returns less significant due to the ballooning money supply. This clarifies why scarce assets like Bitcoin and certain leading tech companies may continue to perform well, even during an economic slowdown. If the S&P 500 continues on its downward trajectory, investors might exit risk markets initially, irrespective of their scarcity or growth potential, potentially impacting Bitcoin’s performance negatively.
However, it’s essential to acknowledge that this analysis overlooks the fact that inflation and recession pressures will likely expand the money supply, either through additional Treasury debt issuance or the Fed’s bond purchases in exchange for U.S. dollars. In either scenario, increased market liquidity tends to favor Bitcoin, as investors may seek refuge in alternative assets to hedge against “stagflation”, a scenario characterized by stagnant economic growth accompanied by rampant inflation.
In light of these dynamics, the DXY’s golden cross may not necessarily spell doom for Bitcoin, particularly when assessing longer timeframes. The interplay of economic forces and investor sentiment will ultimately determine Bitcoin’s resilience and performance in the ever-evolving financial landscape.
