Key Takeaways:
- The U.S. Dollar Index jumped continued its tradition to jump to new 20-year highs.
- Stock and crypto markets trembled in the wake of the strengthening dollar.
NEW DELHI (CoinChapter.com) — The US Dollar Index (DXY) broke above $110 for the first time in 20 years, marking the third week of its ongoing rally.
The index pared gains afterward, but the jump marks another day of the dollar charting new multi-year highs. DXY’s latest jump rode on the back of expectations of more monetary policy tightening. Meanwhile, the Euro hit new lows as the energy crisis worsened in Europe, breaching 0.99.
The European energy crisis might act as fodder for DXY’s ongoing bull run. In detail, the DXY compares the U.S. dollar with a basket of six other currencies, with Euro weighing in at 57.6% in the calculation. Weakness in any one currency adds to the strength of the dollar.
DXY’s bull run seems likely to continue, with the US leading the world’s central banks in the rate hiking cycle. Despite the US job markets remaining robust, inflation rates might stay higher if the Federal Reserve deems it necessary to break inflation.
The rising dollar might be good news for fiat traders, but it significantly affects the global economy. A stronger dollar might contribute to the US trade deficit, as a more valuable currency makes exports more expensive and less competitive in world markets.
Meanwhile, Asian markets continue to invest in the US dollar due to the impact of lockdowns and COVID-19 measures in China.
Stronger US Dollar’s Impact On Stocks
Global stocks fell on Monday due to fears of a worsening energy crisis. Moreover, the rising dollar would make life difficult for many global corporations since a stronger dollar would cut their profits as the foreign exchange move against them.
Furthermore, losses due to foreign exchange rates also hurt the stock markets. A 2018 study by S&P Global indicated that S&P 500 companies with the least exposure to foreign revenue tend to perform well when the dollar is strengthening.
Another interesting finding is that the S&P 500 rises 3.7 times more from a falling dollar than a rising one since a falling dollar helps international business.
Both S&P 500 and the Dow Jones Industrial Average were down on Monday, even as indices worldwide saw red. The German index DAX fell by more than 2% in 24 hours. Last week, European markets finished broadly lower, reacting to Jerome Powell’s hawkish comments.
Additionally, European equities recorded their 29th consecutive weekly outflow, while US equities recorded their biggest outflow in 10 weeks.
In the coming days, the ECB will be in focus as the market is betting on a 70% probability of a 75-basis-point increase. Russia’s decision not to re-open the Nord Stream 1 pipeline would add another headwind to Europe’s energy crisis.
Asian markets will focus on Chinese trade balance data coming out on Tuesday and Aug CPI and Producer Price Index (PPI) data out on Friday.
Crypto Struggling In Wake Of Stronger Dollar
Bitcoin prices fell to levels that were the crypto’s highest point in 2017, with the 20-week EMA (red wave) moving below the 200-week EMA (green wave) to form a death cross.
The death cross would likely hinder Bitcoin’s attempts to move above $20,000.
With the dollar index hitting 20-year highs throughout 2022, traders would likely dump stocks and cryptos. Crypto trader Roman noted DXY’s uptrend and stated that a bullish case for cryptos is unlikely if the U.S. dollar’s rampage continues.
Moreover, the worsening European energy crisis has left people with lesser money to spend on risky assets like crypto. Analysts PlanB even suggested that people struggling with food and gas prices should refrain from buying cryptos.
Meanwhile, the overall crypto market cap remains below $1 trillion.
Energy Crisis Worsening
On the other hand, OPEC and its allies, including Russia, have cut oil production by 100,000 barrels per day to combat falling oil prices. The move has sent Euro’s member states rushing to ensure energy supplies for the coming months.
The move follows a statement last month from Saudi Arabia’s energy minister that the OPEC+ coalition could reduce output at any time. Oil producers have resisted a call from US President Joe Biden to increase oil production.
The supply cut, though negligible compared to the 43.8 million barrels per day under OPEC+ production goals, proved many analysts’ predictions of no output change wrong.
“Oil (and pump) prices have been falling. 100kbd may seem negligible but the message from today’s cut is clear: OPEC+ thinks they’ve fallen enough.“
Columbia University energy policy expert Jason Bordoff tweeted
Though largely symbolic, the decline in supply might further worsen Europe’s energy crisis. As a result, the Euro might fall further and strengthen the dollar in its wake.
