Bitcoin Faces Pressure as Dollar Strengthens
Bitcoin is struggling to maintain its footing as the U.S. dollar continues to surge. The dollar index (DXY), which measures the dollar’s value against a basket of global currencies, reached its highest point in 20 years, trading around 112.8.
As the greenback strengthens, risk assets like Bitcoin and stocks are under heavy pressure. Bitcoin has fallen below the $20,000 level, trading near $18,800. This latest dip underscores the impact of rising U.S. interest rates on global liquidity and investor sentiment.
The Federal Reserve’s Tightening Policy
The Federal Reserve’s ongoing campaign to raise interest rates to combat inflation has made the dollar more attractive to investors. Higher borrowing costs limit liquidity in markets, making it harder for traders to deploy capital into riskier assets such as cryptocurrencies.
The Fed’s decision to stop buying U.S. Treasury bonds has also led to rising bond yields, further bolstering the dollar’s value. As demand for U.S. debt increases, the dollar strengthens relative to other currencies — a dynamic that has driven capital away from Bitcoin and equities.
The Dollar Milkshake Theory at Work
The rapid rise of the dollar aligns closely with the “Dollar Milkshake Theory,” proposed by Brent Johnson of Santiago Capital. The theory suggests that as the Federal Reserve tightens monetary policy, global liquidity is drawn into the U.S. due to its role as the world’s reserve currency.
This influx of capital has pushed the dollar higher against other major currencies. The euro has fallen to a 20-year low, while the Japanese yen recently hit a 24-year low, prompting intervention from Japan’s government.
What Could End the Dollar’s Dominance?
For cryptocurrencies to rebound, investors are watching for signs that inflation may ease or that global energy prices could stabilize. A sharp drop in the U.S. Consumer Price Index could prompt the Fed to slow its rate hikes, encouraging capital to flow back into risk assets.
Additionally, a resolution to the ongoing Russo-Ukrainian conflict could help restore energy market stability, alleviating some of the economic pressures that have strengthened the dollar.
Until then, Bitcoin and the broader crypto market remain in a vulnerable position as the dollar’s dominance shows no signs of waning.
