Despite inflation, the US dollar is stronger compared to the basket of global currencies.
Where does the strong DXY leave Bitcoin?
YEREVAN (CoinChapter.com) – In November 2021, the United States faced a 6.8% inflation rate, the highest since the early ’80s, as reported by the US Bureau of Labor Statistics. However, the greenback has risen against global currency debasement, according to Daniel Lacalle, Chief Economist and Investment Officer at Spanish asset management company Tressis Gestión.
The expert provided a list of global currencies that weakened compared to the US dollar, including many South American currencies, the Hong Kong Dollar, and the South Korean Won. The three currencies that made the “green list” included the Chinese Renminbi, the Taiwanese Dollar, and the Russian Ruble.
Moreover, the US dollar index chart (DXY) shows a 7.5% uptrend year-to-date and clocked at 96 in the Monday session. In hindsight, DXY reflects the strength of the US dollar against the basket of leading currencies worldwide: Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona.
The US dollar might be the “fairest of them all,” compared to other currencies globally, but the high inflation rate raised concerns about the greenback’s declining buying power. The continuous creation of new dollars via the Federal Reserve’s bond-buying fueled inflation to a four-decade high.
Despite the Fed’s newly adopted hawkish policy to cut on the bonds, Bitcoin put on 11% in the previous week.
Greenback vs Bitcoin?
DXY and Bitcoin charts have displayed an erratic inverse correlation in the past. As a hedge against inflation, Bitcoin has risen against the dropping DXY in the past. On Dec 10, after the Consumer Price Index (CPI) came in at 6.8%, Bitcoin gained 7.6%, but crypto bulls didn’t have much to celebrate as the price fluctuated shortly after.
Matt Maley, the chief market strategist for Miller Tabak + Co, agreed with Bitcoin’s safe-haven status, especially for younger investors.
Bitcoin is still seen as an inflation hedge, especially for younger investors. Since it has few restrictions right now, it is seen as a flight to safety asset for some investors.
Others argue that Bitcoin is far from undermining the greenback. For example, Marc Chandler, chief market strategist at Bannockburn Global Forex, claims that the stock market also rallied in the wake of the CPI report. Thus he saw the correlation between rising inflation and more risky assets, as a group, without singling out the crypto-asset sector.
Noelle Acheson, the Head of Market Insights at Genesis Trading, reported the following:
If Bitcoin is ‘digital gold’ and gold is an inflation hedge, then it follows that Bitcoin is too, right? Unfortunately, there is no evidence to back this up, and even the relationship between inflation and gold has been tenuous over the years. Longer term, however, gold has more than held its value while fiat currencies have declined; Bitcoin could end up doing the same.
However, the dollar vs. Bitcoin argument might not be entirely appropriate, as the assets have several core differences. First, any fiat currency is depreciating by nature due to the supply increase possibility, which the Fed demonstrated in 2021 by flooding the market with newly-printed dollars during the pandemic.
On the other hand, Bitcoin features a limited supply of 21 million coins. Moreover, 19 million have already been minted, which means as the asset gets closer to its mining limit, and the subsequent supply squeeze, it is highly likely to increase in price and buying power.
As of publication, the flagship cryptocurrency traded at $51,918 after gaining 11% in the previous week. The asset approached a crucial resistance/support level at $52700 and halted the rally. The upcoming sessions will show if Bitcoin can break above the bar and continue the bullish streak before the year’s end.
Fed’s hawkish policy prevented the DXY from declining in December and ensured the dollar’s strength against other currencies globally. In the meantime, the 6.8% inflation data might have facilitated Bitcoin’s uptrend. Despite the ongoing debate on the latter’s safe-haven status, Bitcoin could see new highs in 2022, given its appreciative status and shortening supply.
Lilit is an enthusiastic writer, skilled in 3 languages, and interested in writing about the tech world, trading, art, and science. She also has a background in psychology and marketing, which helps deliver the right message to the target audience. Lilit is creative and fast and has the experience of writing for both big marketing companies and small websites and blogs.