The dollar strength index (DXY) is close to falling below 100 for the first time since April as the euro gains, rising from below parity to near $1.1.
The uptrend for USD starting in May 2021 now also seems to have turned into a downtrend as DXY has kept falling since September.
It spiked following the rise in oil and gas prices, as well as because Fed began hiking before the European Central Bank (ECB) by some six months.
Those aggressive Fed hikes are now coming to an end while the Bank of England still hiked by 0.5% with ECB expected to likewise hike.
That changes the dynamics as the euro is to potentially rise further, increasing pressure on DXY.
Gas prices have also dived, starting around August, showing some correlation between DXY and energy prices.
Whether gas will fall further is to be seen as it is now at normal price levels, with both DXY and gas prices potentially giving an insight in what bitcoin might do.
A new paper finds there’s a relationship between gas and bitcoin. That’s because mining bitcoin has energy costs and whether it makes more sense to mine or buy bitcoin directly is affected by energy prices.
The fall in such gas prices should reduce mining costs, allowing miners to potentially hold more bitcoin especially at what they might consider low prices.
That contraction in supply may have contributed to the recent rise in crypto prices which started stabilizing in November.
For DXY, the relationship might be more due to sometime both having similar underlying causes for their moves.
Part of DXY’s strengthening was probably because investors went to cash at record levels, now holding close to $5 trillion.
As they divest from cash, some of them might go to bitcoin, thus causing one to fall and the other to rise but in a weak correlation.
The new disinflationary period in addition means consumers may start having more disposable income, and thus more to potentially invest in crypto.
All these trends, the fall in energy prices, the beginning of disinflation at potentially an accelerated rate later this year, and the end of the dollar bull run, all indicate that bitcoin has potential to the upside.
One developing negative however is growth. It has been on a downtrend for the second half of last year, with Q4 2022 seeing only 1% growth over last year in US.
If that falls down further, we might start getting an actual recession that people feel on the street because just how worse it might get is anyone’s guess especially as central banks keep hiking even when they project close to zero inflation in two years, bringing to the table the risk of deflation.
An actual contraction will have to require some sort of a government response, though they’re deep in debt, so how much can they spend.
Except Germany. Their debt to GDP is at circa 60%. They have room to fire up the European engine, with interest rates here also unlikely to go much above 3%.
That might fend off a recession in Europe, but in USA it might start getting a bit bleak economically in the following two quarters.
Unfortunately for America, their president Joe Biden seems to be a bit weak on the economy, while being excellent on foreign policy.
Whether we will see any competence therefore in what is potentially starting to develop into a recession with unknown depths as it’s unclear just what effect these rate hikes might have once they clear through the system, is unclear.
Just as it is unclear what effect this might have on bitcoin as it may depend on the policy response and we also have to wonder whether central banks are getting a bit confrontational, lowering the chances of bazooka spending.
The weakening of DXY however may well continue in such a situation, and any contraction may hopefully clear as we go into next year, coinciding with general expectations for 2023 where bitcoin is concerned.
That is some bull, but a very timid bull, with some gains that are excellent for traditional finance, but not the sort of gains bitcoiners are used to.
However, we’ll see whether this time markets start looking at bitcoin not six months ahead, but two years ahead, considering its potential outsized gains.