High inflation pressures dollar further down as Bitcoin nears $60K

USD dollar US dollar index, DXY, Bitcoin BTC
“dollar close UP” by shy is licensed under CC BY-NC 2.0

Key Takeaways:

  • US inflation rate rose to 5.4% in September, constituting a 13-year high.
  • The Federal Reserve plans to start implementing the ‘tapering’ policy as soon as November.
  • How will dollar’s recovery affect rallying Bitcoin?

YEREVAN (CoinChapter.com) – Inflation in the U.S. reached a 13-year high of 5.4% in Sep 2021. The dollar dipped as Bitcoin pushed the rally to $59,319 in the European session Friday. Meanwhile, Federal Reserve plans to start cutting back its asset purchases in Nov 2021, which could slow down the rising consumer prices and help the greenback get back on its feet.

Is USD in trouble?

According to the U.S. Bureau of Labour Statistics, the CPI (consumer price index; an indicator of inflation) saw rising prices for food and shelter that made up half of the overall increase. However, the largest individual category was energy.

Francisco Blanch, the Managing Director at Bank of America Merrill Lynch, commented on the energy prices, saying that the “market is seeing inventory declines.” However, he added that the supply does not meet the demand, and the deficit could double or triple in the winter months, driving the price up.

The cause-effect relationship between inflation and energy prices is not direct. However, being a significant input into the economy, the rising fuel value tends to spur the CPI.

As a result of the rising inflation, the U.S. dollar index (DXY), which measures the dollar’s value against a basket of top foreign currencies, including the Euro and Japanese Yen, was in choppy trading quarter-to-date (QTD).

DXY has fallen 0.61% in the previous three days, while Federal Reserve hasn’t started implementing the monetary policies necessary to fight inflation.

US Dollar Index on the decline. Source: DXY on TradingView.com
U.S. Dollar Index daily price chart. Source: DXY on TradingView.com

What’s next?

Experts believe that the bearish tendency for the dollar index may shift when the Federal Reserve begins reducing the pace of its monthly asset purchases as soon as mid-November. In a process known as tapering, the Fed will gradually cut back $15 billion of the $120 billion monthly governmental bonds purchases every month.

Shaun Osborne, the chief FX strategist at Scotia Capital, offered his opinion on the matter. He asserted that the recent setback in the DXY is temporary, and the upcoming tapering will help the dollar rebound.

“I don’t think this is, at the moment, anything close to a significant reversal in the dollar trend, and in fact, I think what we’ve seen today might be a sign that the corrective rebound that we’ve seen over the past day or two has perhaps run its course,”

Meanwhile, many investors turn to the crypto market to hedge their assets against inflation. Bitcoin has become a haven against the fiat market instability after the Covid-19 pandemic.

Related: More opportunities for Bitcoin & Co. following Vladimir Putin’s open crypto endorsement.

Bitcoin vs. USD?

Chart analysis suggests that there is an erratic correlation between the U.S. dollar index and Bitcoin. Thus, when the dollar weakens, many investors tend to turn to Bitcoin for gains. Unfortunately, the alpha cryptocurrency had a weak September, with an 18% overall loss. Meanwhile, the DXY rose almost 2%.

Bitcoin daily chart. Source: BTCUSD on TradingView.com
Bitcoin daily chart. Source: BTCUSD on TradingView.com

Between Nov 2020 and Jan 2021, while Bitcoin surged by over 200%, the dollar took a back seat and declined by 4.9%. As a result, it is unclear how Bitcoin will react to the Fed’s tapering policy.

Coinbase, one of the largest crypto exchanges, commented on Bitcoin’s rising price regardless of the Fed’s tapering plans. The exchange’s weekly email claimed that BTC has been growing in value for reasons other than the declining dollar index.

“The positive sentiment in BTC has been partially driven by the expectations of a potential approval for a futures-based Bitcoin ETF in the near future. Other factors contributing to the rise include continued inflows from institutional investors and SEC (U.S. Securities and Exchange Commission) Chairman Gary Gensler telling Congress that the agency has no plans to ban crypto,”

asserted the exchange in a weekly email.

The flagship cryptocurrency traded at $59,452 in the European session Friday.

Also read: Bitcoin looks to pump higher as George Soros’ fund confirms holding BTC.

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