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 with other fiat currencies such as the pound, euro, Japanese yen and Swiss franc.
US Dollar Index “Golden Cross” Confirmed
Additionally, investors are concerned that a surge in U.S. dollar demand could pose challenges for Bitcoin (BTC) and cryptocurrencies, although these concerns are not necessarily related to each other.
The DXY Index confirmed a golden cross pattern when the 50-day moving average moved above the 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 historical trends are determined solely by price patterns, it’s worth noting that the U.S. dollar showed strength in September even in the face of concerns about inflation and economic growth in the world’s largest economy.
Market expectations for U.S. GDP growth in 2024 hover at 1.3%, lower than the average growth rate of 2.4% in the previous four years. This slowdown has been attributed to factors such as tightening 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 signals that a recession is imminent or inflation is rising sharply as the most likely scenario.
There is little incentive to strive for a 4.4% yield when inflation is currently 3.7% and trending upward, prompting investors to demand an annual return of 4.62% on the 5-year Treasury note as of September 19, a record high 12 years.
The data is a clear sign that investors are eschewing government bonds in favor of the safety of cash positions. This may seem counterintuitive at first, but is consistent with the strategy of waiting for a more favorable entry point.
Investors expect the Federal Reserve to continue raising interest rates, allowing them to capture higher yields in the future.
If investors lack confidence in the Fed’s ability to curb inflation without causing major economic damage, there may not be a direct link between a stronger dollar and reduced demand for Bitcoin. On the one hand, interest in risk assets has indeed declined, as evidenced by the S&P 500’s 4.3% negative performance in September. However, investors recognize that hoarding cash, even in money market funds, does not ensure stable purchasing power.
On the one hand, interest in risk assets has indeed declined, as evidenced by the S&P 500’s 4.3% negative performance in September. However, investors recognize that hoarding cash, even in money market funds, does not ensure stable purchasing power.
More funds in circulation is good for Bitcoin price
As governments continue to raise the debt ceiling, investors face dilution and nominal returns become less important as the money supply increases. This explains why scarce assets like Bitcoin and some leading tech companies are likely to perform well even during economic slowdowns.
Related: How much is Bitcoin worth today?
If the S&P 500 continues its downward trend, then investors may exit risky markets regardless of their scarcity or growth potential, at least initially. In such an environment, Bitcoin may indeed face negative performance.
Notably, however, this analysis ignores the fact that the same pressures from inflation and recession may increase the money supply, whether through additional Treasury issuance or the Fed buying bonds in exchange for dollars.
Either way, increased market liquidity tends to benefit Bitcoin, as investors may seek refuge in alternative assets to prevent “stagflation” – a condition characterized by stagnant economic growth and rampant inflation.
Therefore, a DXY golden cross will not necessarily have a net negative impact on Bitcoin, especially on longer time frames.
This article is for general information purposes only and is not intended to be, and should not be construed as, legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.