The Dollar Strength Index (DXY) has reached its highest level in almost 10 months, indicating growing confidence in the United States dollar compared to other fiat currencies like the British pound, euro, Japanese yen, and Swiss franc. This surge in demand for the U.S. dollar has raised concerns among investors about the potential impact on Bitcoin (BTC) and cryptocurrencies, although these concerns are not necessarily interconnected.
The DXY recently confirmed a “golden cross” pattern, which occurs when the 50-day moving average surpasses the longer 200-day moving average. Technical analysts often interpret this signal as a precursor to a bull market. Despite some investors believing that historical trends are solely determined by price patterns, it’s important to note that the U.S. dollar has exhibited strength, even in the face of concerns about inflation and economic growth in the world’s largest economy.
Market expectations for U.S. gross domestic product growth in 2024 are currently at 1.3%, lower than the 2.4% average rate over the past four years. This slowdown is attributed to factors such as tighter monetary policy, rising interest rates, and diminishing fiscal stimulus.
However, not every increase in the DXY reflects heightened confidence in the economic policies of the U.S. Federal Reserve. For example, if investors choose to sell U.S. Treasuries and hold onto cash, it suggests a looming recession or a significant uptick in inflation as the most likely scenarios.
The current inflation rate is 3.7% and on an upward trajectory, which discourages investors from securing a 4.4% yield. Consequently, investors are demanding a 4.62% annual return on five-year U.S. Treasuries as of September 19, the highest level in 12 years.
This data unequivocally demonstrates that investors are avoiding government bonds in favor of the security of cash positions. This may seem counterintuitive initially, but it aligns with the strategy of waiting for a more favorable entry point. Investors anticipate that the Fed will continue raising interest rates, allowing them to capture higher yields in the future.
If investors lack confidence in the Fed’s ability to curb inflation without causing significant economic harm, a direct link between a stronger DXY and reduced demand for Bitcoin may not exist. While there is indeed a decreased appetite for risk-on assets, evident from the S&P 500’s negative performance of 4.3% in September, investors recognize that hoarding cash, even in money market funds, does not ensure stable purchasing power.
Moreover, as the U.S. government raises the debt ceiling, investors face dilution, making nominal returns less significant due to the increased money supply. Scarce assets like Bitcoin and some leading tech companies may perform well even during an economic slowdown.
If the S&P 500 continues its downtrend, investors might exit risk markets regardless of their scarcity or growth potential, at least initially. However, the same pressures from inflation and recession are likely to increase the money supply, either through additional Treasury debt issuance or the Fed’s bond purchases in exchange for U.S. dollars.
Increased liquidity in the markets tends to favor Bitcoin since investors may seek refuge in alternative assets to protect against stagflation – a situation characterized by stagnant economic growth alongside rampant inflation.
Therefore, the DXY golden cross may not necessarily be a net negative for Bitcoin, particularly on longer timeframes. It’s essential to note that this analysis is for general information purposes and should not be taken as legal or investment advice. The views expressed here are the author’s alone and do not necessarily reflect the views and opinions of Cointelegraph.