The Dollar Strength Index (DXY) recently reached its highest level in almost 10 months, indicating a growing confidence in the United States dollar compared to other fiat currencies. This surge in demand for the U.S. dollar has raised concerns among investors, particularly regarding its potential impact on Bitcoin and cryptocurrencies.
The DXY confirmed a golden cross pattern, a signal often seen as a precursor to a bull market by technical analysts. This development suggests that the U.S. dollar’s strength is likely to continue in the near future.
Despite concerns about inflation and economic growth in the United States, the U.S. dollar has exhibited strength in September. Market expectations for U.S. gross domestic product growth in 2024 are lower than the average rate of the previous four years, 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. 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, making it less attractive for investors to secure a 4.4% yield. As a result, investors are demanding a 4.62% annual return on five-year U.S. Treasuries, the highest level in 12 years. This data shows that investors are avoiding government bonds in favor of cash positions, aligning 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. However, 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 a decreased appetite for risk-on assets, as seen in the negative performance of the S&P 500 in September, investors recognize that hoarding cash does not ensure stable purchasing power. As the government continues to raise the debt ceiling, investors face dilution, rendering nominal returns less significant due to the increased money supply. This explains why scarce assets like Bitcoin and leading tech companies may perform well even during an economic slowdown.
Increased liquidity in the markets tends to favor Bitcoin since investors may seek refuge in alternative assets to protect against stagflation. Therefore, the DXY’s golden cross may not necessarily be a net negative for Bitcoin, particularly on longer timeframes.
It is important to note that this article 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 of Cointelegraph.
