On September 22, the Dollar Strength Index (DXY) reached its highest level in nearly 10 months, signifying a surge in confidence in the United States dollar compared to other major fiat currencies like the British pound, euro, Japanese yen, and Swiss franc.
Additionally, the DXY confirmed a “golden cross” pattern, a technical signal often considered a precursor to a bull market.
This development has sparked concerns among investors about its potential impact on Bitcoin and cryptocurrencies.
In this blog post, we will explore the significance of the DXY’s golden cross and its implications for the cryptocurrency market.
Understanding the DXY ‘Golden Cross’
The DXY golden cross occurs when the 50-day moving average crosses above the longer 200-day moving average, signaling a potential shift towards a bull market.
This pattern is closely monitored by technical analysts and can have significant implications for currency markets and other asset classes.
Inflation and Economic Factors
Despite concerns about inflation and economic growth in the United States, the DXY has exhibited remarkable strength in September.
Market expectations for U.S. gross domestic product (GDP) growth in 2024 are modest, hovering at 1.3%, significantly lower than the 2.4% average rate over the preceding four years.
This slowdown can be attributed to factors such as tighter monetary policy, rising interest rates, and reduced fiscal stimulus.
However, it’s essential to recognize that not every increase in the DXY necessarily reflects unwavering confidence in the economic policies of the U.S. Federal Reserve.
For instance, if investors choose to sell U.S. Treasurys and opt for cash positions, it suggests concerns about an impending recession or a significant uptick in inflation.
The Current State of Inflation
As of September 19, the inflation rate stands at 3.7%, and it is on an upward trajectory. In such an environment, there is little incentive to secure a 4.4% yield on U.S. Treasurys, leading investors to demand a 4.62% annual return on five-year U.S. Treasurys, marking the highest level in 12 years.
This data unequivocally indicates that investors are shying away from government bonds in favor of the security offered by cash positions.
While this might appear counterintuitive initially, it aligns with the strategy of waiting for a more favorable entry point, especially with the anticipation of the Federal Reserve continuing to raise interest rates to capture higher yields in the future.
The Link Between DXY Strength and Bitcoin
The question arises: Does a stronger DXY necessarily mean reduced demand for Bitcoin? The answer is not straightforward.
While there is indeed a decreased appetite for risk-on assets, as evidenced by the S&P 500’s negative performance of 4.3% in September, investors also understand that hoarding cash, even in money market funds, does not guarantee stable purchasing power.
Increasing Money Supply and Bitcoin’s Favor
As the government continues to raise the debt ceiling, investors face dilution of their holdings due to the increased money supply.
This dilution makes nominal returns on traditional assets less appealing, which is one reason why scarce assets like Bitcoin and some leading tech companies may continue to perform well even during an economic slowdown.
If the S&P 500 continues its downward trend, investors might initially exit risk markets regardless of the scarcity or growth potential of assets like Bitcoin.
However, this analysis overlooks the fact that the same pressures from inflation and recession will likely increase the money supply, either through additional Treasury debt issuance or the Fed’s bond purchases in exchange for U.S. dollars.
Increased Liquidity and Bitcoin
In this context, increased liquidity in the markets tends to favor Bitcoin. Investors may seek refuge in alternative assets like cryptocurrencies to protect against “stagflation,” a situation characterized by stagnant economic growth alongside rampant inflation.
In conclusion, the DXY’s golden cross and its surge to a 10-month high have raised concerns about its potential impact on Bitcoin and cryptocurrencies.
While there may be short-term market reactions due to risk aversion, it’s essential to consider the broader economic factors at play.
Increased money supply and the quest for assets that can preserve value in the face of inflation could ultimately support Bitcoin’s performance, particularly on longer timeframes.
Investors should remain vigilant and monitor the evolving economic landscape, as the relationship between traditional financial markets, fiat currencies, and cryptocurrencies continues to evolve in an ever-changing global economy.