Since mid-September, the Dollar Index has been on a downward trend and is down around 9%. At issue is a slowdown in inflation and thus potentially monetary tightening imposed by the US Federal Reserve (FED). Is this a sign of a bullish rebound for Bitcoin (BTC) and other cryptos?
Dollar index (DXY) in free fall
Two months after hitting a high of 114 points, the Dollar Index continues its downward phase. The index, which tracks the value of the dollar against a basket of six other currencies, is down about 9%. It is currently at 104 points, its lowest since June.
The fall of the dollar index since mid-September
The main reason for the drop is the turnaround in US inflation. In October 2022, consumer prices rose by 7.7% year-on-year, compared with 8.2% in September and a record 9.1% in June. In other words, inflation seems to be cooling off.
Secondly, the Chairman of the US Federal Reserve (FED), Jerome Powell, announced on Wednesday that rate hikes would be less significant in the future. As a reminder, this corresponds to the interest rates paid by commercial banks to the Federal Reserve to borrow money (and therefore invest in the markets).
As you can see, the higher the FED rates, the less banks want to borrow to invest. Risky markets (stocks or cryptos) fall and safe havens (gold or dollar) rise. If these rates go down, then we should expect the opposite phenomenon.
Some believe that inflation in the US has peaked and that the FED’s monetary policy should ease in the future. In other words, they are taking advantage of this to get out of safe havens like the dollar (explaining the fall) to re-expose themselves to risky markets (cryptocurrencies, for example).
A sign of a rebound for cryptos?
There’s no denying that the crypto market is dependent on the macroeconomic environment. The Covid crisis and the Russian-Ukrainian conflict proved it: cryptos are not escaping their status as risky assets for the time being, although Bitcoin (BTC) is meant to be a safe haven.
In this sense, a slowdown in the monetary tightening imposed by the FED for several months (to deal with inflation) could therefore mean a return of liquidity to risky markets such as cryptocurrencies. At least that is what many investors are expecting.
A top in the dollar index and a weakening could be a sign of a low point in Bitcoin and a return to strength. Especially since the fundamentals, highlighted by the on-chain analysis of our expert Prof. Chain, show that capitulation is near and that Bitcoin is highly undervalued.
Is this really the case? This is a debate that divides analysts. On the one hand, some confirm the above analysis, while others deny it. For the latter, the fall in the dollar index is merely a retracement that will allow for an even stronger upward movement.
Indeed, inflation is falling but the figures are still extremely high. The US has not seen such a rise in consumer prices since 1982. To really reverse the trend, the FED will certainly have to continue its policy of raising rates.
As a result, the dollar index will probably rise again and the Bitcoin price will have to wait a little while before it can start to rise again.
