YEREVAN (CoinChapter.com) – The US dollar index (DXY), which reflects the greenback’s strength against a basket of top foreign currencies, pared its year-to-date gains and stood nearly 10% lower than its Sep 28 peak.
Notably, the drop came from dovish statements from Fed Chair Jerome Powell on Nov 30.
Dollar Loses Altitude
In detail, Fed’s hawkish policies mean tougher borrowing terms and higher interest rates for consumers and businesses. They are designed to slow down the economy, subside consumption, and, by extension, inflation.
Conversely, a slowdown in hawkish policies means faster growth and a bullish phase for the stock market.
Powell signaled the Fed would slow the pace of interest-rate increases in December while stressing borrowing costs will need to keep rising and remain restrictive for some time to beat inflation.
Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.
As CoinChapter reported in early November, the dollar’s 2022 rally was partially due to large hedge funds, such as Brevan Howard, running wagers on the greenback. In addition, the MLIV Pulse survey suggested that Powell might send investors scrambling if he gave any dovish signals during the November press conference.
As it happened, the Fed loosened its quantitative tightening plans for December. That means the investors might expect more DXY decline in the coming month.
Meanwhile, how might the falling greenback influence the crypto market?
Bitcoin vs. DXY
As CoinChapter noted previously, due to Bitcoin’s high correlation with risk-on assets, it tends to suffer in times of economic distress. Additionally, when the broad dollar rises, so does the interest of institutional investors, creating an erratic inverse correlation between the dollar and the flagship crypto.
In detail, the investors’ determination to bet on the dollar sent the stock market into a downward spiral, and the digital assets followed suit. Conversely, investors might turn to the stock market when the broad dollar slumps, creating additional buying pressure on the crypto market.
What’s Ahead for the Crypto Market?
While the geopolitical situation is far from stable and could cause more chaos for global markets, the Fed’s dovish approach for December sent the broad dollar into a pit. As mentioned, the latter erased half of its gains year-to-date and could lose more before the quarter is through.
Thus, if investors turn to the stock market to hedge their funds, Bitcoin could enjoy a proxy rally. Additionally, the flagship crypto has been flashing possible reversal signs throughout November, solidifying bullish expectations.
However, crypto investors should note that a confident recovery might not occur in December, as Bitcoin bulls have yet to put real weight behind the coin and induce buying pressure, as evidenced by the declining trading volumes on the chart above.
As of Dec 5, BTC/USD exchange rate stood at just over $17,200.
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