The Dollar Strength Index (DXY) reached its highest level in almost 10 months on September 22, indicating a growing confidence in the United States dollar compared to other fiat currencies. This surge in demand for the US dollar has raised concerns among investors about its potential impact on Bitcoin and other cryptocurrencies.
One significant development is the confirmation of a “golden cross” pattern in the DXY. A golden cross occurs when the 50-day moving average surpasses the longer 200-day moving average, which is often seen as a precursor to a bull market by technical analysts.
Despite concerns about inflation and economic growth in the US, the dollar has exhibited strength in September. Market expectations for US gross domestic product (GDP) 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 confidence in the US Federal Reserve’s economic policies. When investors choose to sell US Treasurys and hold onto cash, it suggests potential recession or increased inflation as likely scenarios. The current inflation rate of 3.7% and its upward trajectory have led investors to demand a 4.62% annual return on five-year US Treasurys, the highest level in 12 years.
This data shows that investors are opting for cash positions instead of government bonds, which may seem counterintuitive at first. However, it aligns with the strategy of waiting for a more favorable entry point, anticipating that the Fed will continue raising interest rates to capture higher yields in the future.
The impact of a stronger DXY on the demand for Bitcoin is not directly correlated. While there is a decreased appetite for risk-on assets, investors recognize that hoarding cash does not ensure stable purchasing power. As the government raises the debt ceiling and increases the money supply, scarce assets like Bitcoin and leading tech companies may perform well even during an economic slowdown.
Increased liquidity in the markets can favor Bitcoin as investors seek refuge in alternative assets to protect against stagnant economic growth and rampant inflation, a scenario known as “stagflation.” Therefore, the DXY golden cross may not necessarily have a negative effect on 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 solely those of the author and do not necessarily reflect the views of Cointelegraph.