DXY rises causing Bitcoin to fall
Bitcoin is fighting against the dollar — and it is in a weak position.
The USD Index (DXY), a financial instrument that measures the price of the US dollar against a basket of other currencies, hits a 20-year high, sending other currencies and risk assets around the world taking a hit. serious. DXY is currently at 113.02, down slightly after hitting an intraday high of 113.23.
Market cryptocurrency has been particularly hard hit in recent weeks due to the greenback's renewed strength. In August, BTC had a brief rally to $25,200 as the US dollar fell below its July high. However, it has been squashed under the weight of the rising dollar ever since. BTC is currently pinned below $20,000 while the dollar continues to rise, trading at around $19,170 at press time.
Much of the dollar's strength can be traced back to interest rate hikes by the US Federal Reserve (Fed). When the Fed raises interest rates to fight inflation, it will tighten the liquidity of the US dollar. This will help reduce inflation by making it more expensive to borrow money, thereby reducing demand. This move has made the dollar a much more attractive investment.
The tightening of liquidity means that market participants have less cash to invest in riskier assets like cryptocurrencies and stocks. In turn, this reduces demand, causing asset prices to drop. The Fed has also stopped buying US Treasuries as part of its tightening policy, which has sent US bond yields up, boosting the dollar's value as more investors buy these bonds.
The Dollar Milkshake Hypothesis
It's not just cryptocurrencies and stocks that are under pressure from the surge in the US dollar. As the Fed begins to raise interest rates to fight inflation ahead of other countries and becomes increasingly aggressive in the size of the increase, liquidity from the global economy is flowing into the US dollar at a record pace.
This effect is known as the “Dollar Milkshake Hypothesis,” coined by CEO Brent Johnson of Santiago Capital. This theory assumes that the USD will suck liquidity from other currencies and countries around the world whenever the Fed stops printing because of its role as the world's reserve currency.
Since the US reserve bank shut down its money printers and started tightening liquidity in March, the Dollar Milkshake hypothesis seems to be working. The euro, which has the largest share against the dollar in the DXY, has fallen sharply throughout 2022, recently hitting a new 20-year low of 0.978 against the dollar.
Other world currencies are no better. The Japanese yen fell to a 24-year low on Thursday (September 22), prompting the government to step in to support the currency. While the European Central Bank has responded to the weakening euro by raising interest rates, the Bank of Japan has so far refused to do the same. This is the Japanese government Active Yield Curve Control (Yield Curve Control), keeps interest rates at -0.1% while buying unlimited 10-year government bonds to keep yields at target level of 0.25%.
It seems that assets like cryptocurrencies are finding it increasingly difficult to find strength amid a global economic downturn. However, there are some signs of the end of dollar dominance and its immediate effects. If next month's Consumer Price Index (CPI) data records a significant decline, investors may turn to riskier assets in the hope that Fed will restrain interest rate hikes. Elsewhere, a solution to the current Russo-Ukrainian war could help alleviate the global energy crisis by reducing oil and gas costs. For now, however, there aren't any signs that the dollar's appreciation will slow down — and that could leave the cryptocurrency stuck near its yearly lows.