As we reported on cryptokoin.com, the crypto market is struggling to stay above June lows due to the growing strength of the dollar. The dollar index (DXY) is a financial instrument that measures the price of the dollar against a basket of other currencies. DXY hit a 20-year high on Friday. This caused other world currencies and risk assets to fall. DXY, which measures the dollar’s value against other currencies, has surpassed 112.
The dollar is becoming a much more attractive investment vehicle
The cryptocurrency market has taken a particularly hard hit in recent weeks due to the renewed strength of the dollar. In August, Bitcoin experienced a short rally to $25,200. But since then, crypto assets have been crushing under the weight of the rising dollar. Bitcoin is currently consolidating below $20,000. The dollar continues to climb. Much of the dollar’s positive price action can be traced to rising interest rates from the Federal Reserve. The Fed is raising rates to fight inflation, while tightening US dollar liquidity. This will help push back inflation by making it more expensive to borrow money. This will reduce the demand.
But a side effect of such a regimen is that it makes the dollar a much more attractive investment. Tightening dollar liquidity means market participants have less money to invest in riskier assets like cryptocurrencies and stocks. This, in turn, reduces demand, causing asset prices to fall. The Federal Reserve has also stopped buying US Treasury bonds as part of its tightening policy. This resulted in higher yields on U.S. bonds. Thus, it helped increase the value of the dollar as more investors bought the bonds. Crypto and stocks aren’t the only ones suffering from the rising US dollar. The Fed began raising interest rates before other nations to combat inflation.
Milkshake Theory
The size of the increases became more and more aggressive. Therefore, liquidity from the global economy is flowing into the US dollar at a record pace. This effect is called the “Dollar Milkshake Theory” by Brent Johnson, CEO of Santiago Capital. When the Fed stops printing because of its place as the world’s reserve currency, it assumes that the dollar will draw liquidity from other currencies and countries around the world. The dollar Milkshake Theory works, as the US reserve bank began tightening liquidity in March. Euro, which has the biggest weight against the dollar in DXY, has lost value throughout 2022. Recently, it reached a 20-year low of 0.9780 against the dollar.
As things continue, it’s getting harder and harder for assets like cryptocurrencies to find strength in a deteriorating global economy. However, there are a few signs that could indicate the end of the dollar’s dominance and on-chain effects for investors. If next month’s Consumer Price Index data drops significantly, investors may turn to riskier assets in hopes that the Fed will cut rate hikes. However, a solution to the current Russo-Ukrainian War could help alleviate the global energy crisis by reducing the cost of oil and gas. Still, the dollar’s rise shows no signs of slowing down for now. Therefore, the crypto could stay close to the lows of the year.
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