The US dollar is one of the most critical currencies globally, and changes in its value can have a profound impact on various markets, which also extends to cryptocurrencies. The recent sharp recovery of the US dollar has raised concerns about its potential impact on Bitcoin, which has been teasing a major bull run in recent months.
The Dollar So Far
Amid the ongoing narrative about a potential recession this year, the US Dollar Index shows a strong performance of the greenback against other major foreign currencies. The dollar saw a rise of 4% as of last Friday from its low of 100.82 the month before. This is backed by improving conditions in the labor sector wherein the unemployment rate dropped by 2,000 to a seasonally adjusted 190,000 in the week ending on February 25.
Despite consumer spending posting favorable figures in the first month of the year, 90% of the businesses in the manufacturing sector are plagued by a spike in their input prices even though the supply chain has eased up.
With all the factors considered, Americans are not yet out of inflation. As a result, the Bank of America Global Research group projected that the US Federal Reserve may drive up interest rates to 6% from the present 4.5% to 4.75% range to maintain investors’ demand.
Effects on Bitcoin and Other Crypto Assets
When the US dollar strengthens, it means that its value increases relative to other currencies. As a general rule, this can create polarizing effects on the cryptocurrency market, especially Bitcoin, which may include the following scenarios:
- A stronger US dollar can make traditional investments, such as stocks or bonds, more attractive to investors. This can lower demand for alternative forms of investments, leading to lower prices for Bitcoin and other cryptos.
- High dollar value can reduce expectations of inflation. This can decrease demand for Bitcoin, as it is often viewed as a hedge against inflation.
- If the US dollar is rallying due to economic or geopolitical uncertainty, Bitcoin may benefit as investors will look for alternative investments to protect their assets. For example, during the COVID-19 pandemic, Bitcoin’s value increased as investors sought alternative assets to traditional investments.
The recent sharp recovery of the US dollar has put Bitcoin’s 25K breakout prospects at risk. The value of Bitcoin dropped by 13% as the US dollar started to recover. This suggests that the cryptocurrency market may be more sensitive to changes in the US dollar’s value than previously thought.
However, it is worth noting that the correlation between the US dollar and Bitcoin can vary over time and may depend on other factors, such as market sentiment and investor demand. Furthermore, some cryptocurrencies may be less affected by changes in the US dollar than others, such as stablecoins, which are pegged to the US dollar.
Final Thoughts
The recent sharp recovery of the US dollar has raised concerns about its impact on Bitcoin and the wider cryptocurrency market. While a stronger US dollar can create downward pressure on cryptocurrencies, it is not always the case, and there are instances where cryptocurrencies have benefited from a rallying dollar. It is essential to consider the broader market conditions and investor sentiment to understand how changes in the US dollar may affect the cryptocurrency market.
Giancarlo is an economist by profession with a career spanning nearly two decades. His professional journey has seen him assume vital roles in various government and private organizations such as the Department of the Interior and Local Government (DILG), the National Economic and Development Authority (NEDA), Megaworld Corporation, and the China Banking Corporation in the Republic of the Philippines.
In addition to his civic and corporate pursuits, his forward-thinking approach has led him to manage several prominent websites in the banking and finance sector, notably the Australia-based RateChoice, where he immersed himself in the world of emerging financial technologies and where he found particular interest in Bitcoin all the way back to 2013.
Prior to his addition to Blockzeit’s dynamic team, he held an essential role as Project Manager for initiatives encompassing blockchain, stablecoin, mining, special economic zone development, and iGaming. This noteworthy chapter in his career unfolded under the auspices of InPlan Consultancy Services, Inc., the think-tank of IMPERO Consortium Management Corporation headquartered in Manila, Philippines, and Tokyo, Japan. InPlan, led by a distinguished retired Cabinet member of the Philippines, collaborates directly with IMPERO’s core management team, contributing to strategic planning and business development endeavors.
