Could Fed tapering cause a massive crypto market crash? The dollar answers

Could Fed tapering cause a massive crypto market crash? The dollar answers
“Houses going down” by Images_of_Money is licensed under CC BY 2.0
  • The US dollar should drop down a few notches.
  • Delta variant fears keep Fed tapering plans on hold.
  • Tapering could cause a temporary setback in crypto markets but not a crash.

JAIPUR (Coinchapter) – The US dollar is trading at its peak value and is abundantly circulating within the US economy. Thus, the Fed’s monthly asset purchase tapering would not significantly strengthen the USD and would not bring down cryptocurrency markets drastically.

The Problems With The US Dollar

Rising delta variant cases and diminishing recovery from the pandemic have kept the dollar strong. Also, chatter around the Fed’s near-term tapering of its $120 billion monthly asset purchases supplied bullish headwinds to the greenback.

Related: US dollar gains strength as delta variant fears trigger bitcoin, gold market selloff.

US dollar rose in strength throughout 2021
US dollar rose in strength throughout 2021. Source: Bloomberg

However, there is a fundamental flaw in the USD’s valuation. The U.S. consumer price index which measures the degree of increment in prices of products and services (excluding food and fuel), tripled to 4.3% in 2021. The said figure is a far cry from the numbers spotted in the U.K. (1.8%), Europe (0.7%), and Japan (-0.6%).

Valuation Antithesis

The rise in the dollar’s strength in tandem with rising inflation points to an inherent dissonance in the greenback’s valuation.

And that’s not all. For example, prices of industrial commodities – oil, copper, and iron ore prices of industrial commodities headed south since August began, even while the U.S. dollar index (which measures the dollar’s strength against major currencies) ticked up from 91.9 to a multi-month high of 93.7.

“That is inconsistent with the usual pattern of a strong dollar, which is reflected in higher commodity prices. It’s all a bit illogical, Captain.”

say Bloomberg analysts.

Amid the said inconsistencies with the US dollar’s mathematics is the ample supply of greenback liquidity in the US economy, as mentioned in the beginning. The Fed’s balance sheet expanded by $8 trillion in the last year on record debt purchases. Thus, Bloomberg analysts assert that the chances of any retractions on the said figure are minuscule. Even with a well-strategized tapering plan.

“There is no longer any shortage of dollars swimming about, as was the case in spring 2020. Massive currency swaps with foreign central banks and vast ongoing QE have seen to that.”

Could Tapering Cause Crypto Markets To Crash?

Since Fed’s tapering moves will not drastically reduce the over-bloated dollar supply from the US dollar economic system, the greenback would essentially trade lower.

“Even if there is a reduction in the flow of monthly buying in the next few months, the amount of bonds in the system remains at record levels, with the Fed balance sheet climbing north of $8 trillion. That’s a lot of dollars in the system, which means the currency’s value should be lower not higher.

Consequentially, a Fed taper wouldn’t crash crypto markets. Although there could be a temporary setback as investors would rush to reroute their holdings into USD, overall, the effect wouldn’t be much pronounced.

Also, as per the financial journalists at Bloomberg, a rise in the federal funds rate has a lower chance of materializing until 2023. That means the dollar’s opportunities to shoot up in value wouldn’t show up until then. Plus, Fed Chair Jay Powell is expected to keep tapering discussions on hold in the upcoming Jackson Hole meeting.

Related: Bitcoin looks bullish as BTC tops $50,000 ahead of Fed’s Jackson Hole meeting.

Even if an interest rate uptick does happen, it wouldn’t be substantial. And the dollar would undergo a value correction which indicates that a crypto market crash is nowhere close to fruition.

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