The USD index is at multi-year highs as 2025 begins.
In fact – the USD index hasn’t been over 109 a lot since the turn of the millennium. The USD rally really took off after Trump won the election – but he has been vocal about his desire for a weak USD.
Unsurprisingly, his policies favor the opposite. It looks like McTrumper will get a strong USD when he takes office for the second time.
For cryptocurrencies – a strong USD may be an issue.
Depending on how you view the world of risk and transnational capital flows – a strong USD may be a boon for alternative assets, or it could create the mother of all crashes.
No More Dollar Milkshakes
The USD index measures the value of the US dollar against other fiat currencies – mostly the euro.
Back when the USD index was born, Europe was the only other economy in town – and there was more than one European currency (we miss you Deutsche Mark).
Now, given the fact that Asia is likely the most important economic bloc – the USD index seems kinda dated. That said – besides the JPY – most Asian currencies aren’t reserve or settlement assets.
Funny that…
Regardless – when it comes to investable assets – the big 4 (USD,EUR, GBP, JPY) still reign supreme. With 4 interconnected financial systems comprising more than 80% of SWIFT volume – these currencies matter.
Here is the issue – all of these governments have the ability to borrow at levels that far exceed their ability to EVER make good on the debt. The US federal debt is creeping up on $40 trillion USD – and will continue to pile up as the decade grinds on.
Inflation is a given over the next 5 years. But counterintuitively – the USD may actually rally against other global currencies. The USD could be on the cusp of its biggest rally ever – when measured by other dying financial systems.
Slurping Liquidity
The Dollar Milkshake Theory deserves your attention.
Pioneered by big brain Brent Johnson – the Dollar Milkshake Theory (DMT from here on out) explains why the biggest debtor in human history can keep pumping out dollars – and the dollar will rise vis a vis other currencies.
The DMT also suggests (we think – not sure what Brent thinks about cryptos) that Bitcoin could buck the trend – and rise alongside the USD and gold.
The deal breaks down like this – the US might be the biggest debtor in history, but other nations use the currency (USD) for trade and investment. And debt issuance. So unlike the Korean Won, the US dollar is needed for interest payments on existing debt in huge amounts.
As mentioned – there are trillions of dollars in USD denominated debt out there – all of which creates demand for USDs. But wait – there’s more!
Among the big 4 – USD denominated debt delivers amazing returns.
JPY and EUR debt has far lower yields, and the GBP debt markets can’t provide the liquidity that USD markets can. Money will flow to where it is treated best (highest yields) so as f$%*ed up as it may seem, USD debt markets are actually attractive.
In essence, the sheer amount of USD denominated debt out there creates demand for USDs, even at a time when the US is on a borrowing binge of historic proportions. There just isn’t another nation on the planet that can crank out debt like the USA…
This Seems Off
We understand you may not like the way the DMT frames financial markets. It doesn’t seem fair. As any beggar in Bangladesh will tell you – the world is far from fair!
On the flipside – we all know that fiat money is TRASH and the system is falling apart.
A flagging global monetary system might be the reason why the USD, gold and bitcoin are all near all time highs at the beginning of 2025. Liquidity is flowing into the USD ecosystem, but investors understand that the game is rigged.
There aren’t many liquid financial assets that allow you to escape the fiat debt trap. Bitcoin and gold are two of the biggest – and both are accepted globally.
We think that cryptos in general are a great place to be – and it is a lot easier to send BNB or XRP across borders compared to a gold brick. Customs will flag you for sure!
Persistent Liquidity Crunch Risk
One of the problems that the DMT suggests may happen is a global liquidity crunch. Check out the article below for a little bit more background on bitcoin and global liquidity:
Op-Ed: Crypto’s Crossroads: Market Liquidity, Geopolitics, and the Road to 2025
The bitcoin pump we mentioned in the article above materialized, but we think it has a lot more to do with optimism surrounding McTrumper’s crypto policy – and not much to do with loosening global liquidity.
We reiterate,
“In a market dislocation, crypto prices will be slammed lower. We could see BTC look for support at the $20,000 level if things get bad. There is no fundamental driver for these price declines – should they appear – they would be driven by panic selling.”
With the FED looking to keep rate cut expectations limited – we are unlikely to see a cheap money party materialize in 2025. A high USD is terrible for global liquidity, which means that BTC prices could come under pressure as global markets digest tighter monetary conditions.
The Roaring 80s Again?
We totally underestimated how much love McTrumper’s election would bring to the crypto sphere!
Op-Ed: The Wall of Money Could Hit Markets Anytime
It was simple to see that Trump was the better of the two candidates for crypto – but his election took BTC to $100k on its own. We think that the move might be overdone, and markets are going to waffle for most of 2025.
Unless we get a major shift in central bank policy (free money party a la 2009) and global liquidity. Then, all bets are off and BTC heads to 7 figures.
The article above breaks down what the Plaza Accord was, and why we might see a similar policy action in the medium term. The USD is painfully high – and the US war machine is going full-tilt. Dislocation risks exist.
If and when there is a coordinated effort to knock down the exchange value of the USD, we will see the biggest crypto rally in the post-crypto ETF world. Until then, we would prepare for rough waters ahead.
BTC Goes Much, Much Higher!
With growing debt issuance from the big 4, and many other major nations (looking your way China) alternative assets will rise substantially for the rest of the decade.
The question now is – how much volatility will crypto investors have to stomach before we see BTC at $1 million USD?
Given the FED’s hawkish stance – we think quite a bit of churn is coming to the crypto markets in 2025. If we see a big development in the Middle East – for example – a major attack on Iran – markets could fall apart in a matter of days.
It’s all on the table as we enter 2025.
We love milkshakes BTW. Wouldn’t it be nice if they still cost a dollar…
The post OpEd: Can The US Dollar And Crypto Complex Rally In 2025? appeared first on Blockonomi.
