What is the Dollar Index (DXY)?
The Dollar Index measures the U.S. Dollar’s value in relation to a group of other currencies. The index rises when the United States Dollar strengthens in relation to other currencies. The US Dollar Index is a composite of the United States’ trading partners’ currencies.
It represents the dollar’s value in relation to a few specific currencies, such as the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss Franc. The dollar Index (DXY) started in 1973 with its value at 100. Trading high and low values over the years, the basket’s composition only changed in 1999 following the Euro’s supplantation with some European currencies.
There is a need to update the basket’s composition as significant trading partners such as Mexico, China, Brazil, and South Korea are not included in the index, which has housed Sweden and Switzerland as index members for years.
The Effect of the Dollar Index (DXY) on the Bitcoin and Crypto Market
With Bitcoin so high in 2021, the crypto market struggled to stay above its June lows due to the resurgence of dollar strength in 2022. With an uptrend in August as the dollar declined from its July hike, the Bitcoin price seems to be stuck under $20,000 as the continuous rise in the dollar value has weighed heavily on crypto assets, crushing them.
When the Dollar Index (DXY) reached a 20-year high at the end of September, the dollar drove down the value of other global currencies and risk assets in the stock and crypto markets. Suffering a significant blow these past weeks, Bitcoin is currently trading at $20,000.
The Federal Reserve has hiked the fed interest rates
In order to curb inflation as a macroeconomic tightening policy, The Federal Reserve has hiked the fed interest rates. The Federal Reserve reduces the availability of the US Dollar with this hike to combat inflation. By this, the cost of borrowing is increased, and demand is lowered.
The tightening policy ensures less money for investors to invest in assets such as equities and cryptocurrencies. In addition, the Feds, having stopped the purchase of American Treasury securities, have now caused an increase in the dollar value as investors seek these bonds due to their higher returns. This has resulted in lower demand, which in turn has caused a decline in the prices of assets and cryptocurrencies.
The Federal Reserve is blamed for the dollar’s recent price movement. While the dollar rises against other currencies, the Bitcoin and cryptocurrency markets fall because of the Fed’s rate hike. Cardano, Solana, and other Altcoins suffer more significant losses. Investors suggest a drop in inflation or a resolution of the European energy problem can restore the market.
Effect on Global Currencies
The DXY effect isn’t just affecting the crypto and stock markets alone. The global economy has also been affected. Brent Johnson, the CEO of Santiago Capital, has dubbed this phenomenon the “dollar milkshake theory.” He asserts that the dollar will absorb liquidity from other currencies and nations.
Having turned off its stimulus program and Quantitive Easing and enforced the tightening policy, currencies in the basket like the Euro, which weighs the biggest against dollars, have plummeted, hitting a new 20-year low, and other global currencies are not much better.
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