The US dollar index (DXY), which measures the value of the greenback against a basket of other major currencies, has reached its highest level in almost 10 months, signaling a growing demand for the US currency. This could pose a challenge for Bitcoin (BTC) and other cryptocurrencies, as some investors fear that a stronger dollar could reduce the appeal of alternative assets.
What is the DXY and why does it matter?
The DXY is a weighted average of the exchange rates of six currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. It is often used as a benchmark to gauge the strength or weakness of the US dollar in the global market.
The DXY is influenced by various factors, such as interest rates, inflation, trade, and geopolitical events. A higher DXY means that the US dollar is appreciating against other currencies, while a lower DXY means that the US dollar is depreciating.
The DXY can have an impact on the price of Bitcoin and other cryptocurrencies, as they are often denominated in US dollars or pegged to the US dollar. A stronger dollar could make Bitcoin more expensive for investors who use other currencies, reducing the demand and liquidity for the digital asset. Conversely, a weaker dollar could make Bitcoin more affordable and attractive for investors who seek to diversify their portfolios.
The DXY confirms a bullish ‘golden cross’
On Sep. 22, the DXY confirmed a bullish ‘golden cross’ pattern, when the 50-day moving average crossed above the 200-day moving average. This is a technical indicator that is often seen as a sign of a potential bull market, as it suggests that the short-term momentum is stronger than the long-term trend.
The DXY has been rising steadily since June, as the US economy showed signs of recovery from the pandemic-induced recession. The Federal Reserve (Fed) also signaled that it could start tapering its bond-buying program later this year and raise interest rates in 2024, boosting the expectations for a tighter monetary policy.
The DXY reached 93.73 on Sep. 22, the highest level since Nov. 2020, before retreating slightly to 93.32 at the time of writing.
How does Bitcoin react to the DXY’s rise?
Bitcoin, the largest and most popular cryptocurrency by market capitalization, has been trading sideways in a narrow range between $40,000 and $50,000 for the past month, struggling to break out of the consolidation phase. Bitcoin’s price has been influenced by various factors, such as regulatory uncertainty, environmental concerns, network upgrades, and institutional adoption.
However, some analysts have also pointed out the inverse correlation between Bitcoin and the DXY, suggesting that the rising dollar could put pressure on the cryptocurrency’s price. For instance, on Sep. 20, when the DXY surged to 93.44, Bitcoin dropped to $40,440, the lowest level since Aug. 5.
According to data from Coin Metrics, the 90-day correlation coefficient between Bitcoin and the DXY was -0.37 as of Sep. 22, indicating a moderate negative relationship. This means that when the DXY goes up, Bitcoin tends to go down, and vice versa.
However, the correlation is not always stable or consistent, as it can vary depending on the time frame and the market conditions. Moreover, correlation does not imply causation, as there could be other factors that affect both the DXY and Bitcoin independently or jointly.
Is the DXY’s strength a threat to Bitcoin?
While the DXY’s rise could pose a short-term challenge for Bitcoin, some experts argue that it is not a major threat to the cryptocurrency’s long-term prospects. They believe that Bitcoin has its own intrinsic value and appeal, regardless of the fluctuations of the US dollar or other fiat currencies.
For instance, some investors view Bitcoin as a hedge against inflation, as the cryptocurrency has a limited supply of 21 million coins and a predictable issuance schedule. Unlike fiat currencies, which can be devalued by central banks’ monetary policies, Bitcoin is decentralized and independent of any authority’s control.
Additionally, some investors see Bitcoin as a store of value, as the cryptocurrency has proven to be resilient and adaptable in the face of various challenges and crises. Bitcoin has also shown strong network effects and innovation, as it continues to attract more users, developers, and institutions.
Furthermore, some investors consider Bitcoin as a growth asset, as the cryptocurrency has the potential to disrupt and transform various industries and sectors, such as finance, technology, and social media. Bitcoin also offers opportunities for financial inclusion and empowerment, as it enables anyone with an internet connection to access and participate in the global economy.
Therefore, while the DXY’s strength could affect Bitcoin’s price in the short term, it is unlikely to diminish Bitcoin’s value and potential in the long term.