Author: Marcel Pechman, Cointelegraph; Translated by: Song Xue, Golden Finance
On September 22, the U.S. Dollar Strength Index (DXY) reached its highest level in nearly 10 months, indicating growing confidence in the U.S. dollar compared to other fiat currencies such as the British pound, euro, yen and Swiss franc.
The US Dollar Strength Index "Golden Cross" has been confirmed
Additionally, investors are concerned that a surge in demand for the U.S. dollar could create challenges for Bitcoin and cryptocurrencies, although these concerns are not necessarily related to each other.
US Dollar Index (DXY). Source: TradingView
The DXY index confirmed a golden cross pattern when its 50-day moving average crossed above its longer 200-day moving average, a signal often viewed by technical analysts as a precursor to a bull market.
Impact of recession and inflation risks
While some investors believe that historical trends are determined solely by price patterns, it is worth noting that the dollar has shown strength in September even in the face of concerns about inflation and growth in the world's largest economy.
Market expectations for U.S. GDP growth in 2024 hover at 1.3%, down from an average of 2.4% in the previous four years. The slowdown has been attributed to tighter monetary policy, rising interest rates and waning fiscal stimulus.
However, not every rise in the DXY index reflects increased confidence in the Federal Reserve's (Fed) economic policies. For example, if investors choose to sell U.S. Treasuries and hold cash, it indicates that the most likely scenario is an imminent recession or a sharp rise in inflation.
There is little incentive to earn a 4.4% yield when inflation is currently at 3.7% and trending higher, prompting investors to demand an annual return of 4.62% on the five-year Treasury note as of Sept. 19, the highest in 12 years.
US 5-year Treasury yield. Source: TradingView
The data clearly shows that investors are shunning government bonds in favor of the safety of cash positions, which may seem counterintuitive at first glance but is in line with the strategy of waiting for a more favorable entry point.
Investors expect the Fed to continue raising interest rates, allowing them to earn higher yields in the future.
If investors lack confidence in the Fed's ability to curb inflation without causing significant economic damage, there may not be a direct link between a stronger dollar and reduced demand for Bitcoin. On the one hand, interest in risky assets has indeed declined, as evidenced by the S&P 500's 4.3% negative performance in September. On the other hand, investors recognize that hoarding cash, even in money market funds, does not ensure stable purchasing power.
More money in circulation is good for Bitcoin prices
As governments continue to raise debt ceilings, investors face the risk of currency debasement, which causes nominal returns to become less significant due to the increase in money supply. This explains why scarce assets like Bitcoin and some leading technology companies may still perform well during economic slowdowns.
If the S&P 500 continues its downward trend, investors may exit risk-on markets regardless of their scarcity or growth potential, at least initially. In such an environment, Bitcoin could indeed face negative performance.
It is important to note, however, that this analysis ignores the fact that the same pressures from inflation and recession could increase the money supply, either through additional Treasury issuance or the Fed’s purchase of bonds in exchange for dollars.
Either way, increased market liquidity tends to benefit Bitcoin as investors may seek refuge in alternative assets to protect against “stagflation” — a condition characterized by stagnant economic growth and rampant inflation.
Therefore, a DXY golden crossover is not necessarily a net negative for Bitcoin, especially on longer time frames.
