- The dollar’s appreciation may be attributed to the Federal Reserve raising interest rates.
- As the supply of dollars dwindles, investors will have less money for riskier assets.
Bitcoin is struggling to compete against the US currency. On Friday, the dollar index (DXY), which tracks the value of the dollar relative to a basket of other currencies, reached a new 20-year high, driving down the value of other global currencies and risk assets. DXY, which tracks the dollar’s value relative to a number of other currencies, hit 112.
The resurgent strength of the dollar in recent weeks has had a disproportionately negative effect on the cryptocurrency market. As the dollar fell from its July highs, Bitcoin saw a short upswing in August, rising above $25,000 for a while. Since then, though, crypto assets have been smashed by a rising dollar. At the time of writing, Bitcoin was trading at roughly $19,010, according to statistics compiled by CMC, while the US dollar was rising steadily, putting pressure on Bitcoin’s price.
Correlated to Interest Rate Hike
An increasing share of the dollar’s appreciation may be attributed to the Federal Reserve raising interest rates. When the Federal Reserve increases interest rates, it reduces the availability of dollars for transactions. Making borrowing money more costly should help reduce demand and, in turn, help bring inflation back down. One unintended consequence of such a system is that it boosts the dollar’s appeal as a store of value.
As the supply of dollars dwindles, investors will have less money to put into riskier assets like cryptocurrencies and equities. Moreover, as a result, demand decreases and asset values decline. As part of its tightening strategy, the Federal Reserve has ceased purchasing U.S. Treasury bonds. U.S. bond rates have risen as a result, which is good for the dollar since it encourages more people to purchase U.S. debt.
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