U.S. dollar index retreats from 20 year highs — but will DXY topping spark a Bitcoin recovery?

2 years ago

The U.S. dollar scale (DXY) retreated broadly from its prevailing bull run successful the past 2 weeks, dropping by up to 3.20% aft hitting its two-decade precocious of 105.

Overvaluation risks grip dollar market

Dollar's correction successful the past 2 weeks preceded 12 months of relentless buying.

To recap, the greenback's value against the handbasket of apical overseas currencies grew by astir 14.3% successful a year, chiefly arsenic markets looked for harmless havens against the fears of a hawkish Federal Reserve and much precocious the subject struggle betwixt Ukraine and Russia.

Cash balances among the planetary money managers grew 6.1% connected mean since 9/11, a caller survey of 288 plus allocators by Bank of America showed. The study besides noted that 66% of plus managers judge planetary profits volition weaken successful 2022, prompting them to clasp "overweight" currency positions.

"The marketplace has hoarded a immense magnitude of dollars successful caller months," George Saravelos, strategist at Deutsche Bank, told the Financial Times, adding that it is "leading to a precise important dollar overvaluation."

Thus, the dollar's latest retreat whitethorn person been an interim correction to neutralize its "overbought" conditions, arsenic the greenback's play comparative spot scale (RSI) readings besides suggested (in the illustration below).

From a further method perspective, the DXY could diminution further toward a rising trendline that arsenic enactment has been capping its downside moves since January 2021, arsenic shown below.

If much selloffs occur, the scale is apt to propulsion backmost from its existent absorption range, with the adjacent downside people astatine the 0.786 Fib enactment adjacent 100.

Stronger euro prospects

The DXY besides pulled backmost earlier this week as Christine Lagarde, president of the European Central Bank (ECB), set a caller and much hawkish argumentation connected May 23.

Lagarde committed to involvement complaint hikes by September 2022, frankincense turning distant from ECB's decade-long dovish monetary argumentation that has resulted successful de facto antagonistic involvement rates.

As a result, rates successful Eurozone would sprout backmost to zero, the imaginable of which has made the euro stronger against the dollar.

But adjacent with the ongoing Ukraine-Russia situation and its entree to vigor thrown into haywire, Eurozone's assurance successful concern maturation remains strong, the caller IFO survey shows. That would mean much upside boost for the euro, which could unit the dollar lower.

"It’s inactive excessively soon to accidental with immoderate assurance that the dollar is present into a weakening trend," said John Authers, a elder exertion astatine Bloomberg Opinion, adding:

"But its diminution is different denotation that the 'stagflation and ever-higher rates' communicative is being rethought."

EM currencies versus Bitcoin

A weaker DXY simply represents its declining value against overseas currencies. But a deeper look into the dollar shows weakening purchasing powerfulness successful a precocious ostentation environment. The user terms scale (CPI) was above 8% arsenic of this April 2022.

In result, the dollar, albeit stronger than it was a twelvemonth ago, has not been capable to nonstop emerging marketplace currencies into a tailspin, frankincense breaking disconnected their widely-watched antagonistic correlation.

Notably, returns connected the currencies of processing nations specified arsenic the Brazilian existent and Chilean peso person been higher than the dollar since January 2022.

EM currencies thin to underperform erstwhile the dollar rises, chiefly due to the fact that investors look astatine the greenback arsenic their eventual haven successful times of planetary marketplace uncertainty. But with commodity prices rising owed to the Ukraine-Russia crisis, investors are rethinking their strategy.

Meanwhile, countries expanding their involvement rates are besides creating a amended concern situation for their currencies, says Stephen Gallo, European caput of FX strategy for BMO Capital Markets.

Excerpts from his statement to the Wall Street Journal:

"Emerging-market cardinal banks are forced to tighten argumentation to support gait with the Fed. It’s either that, oregon superior controls are imposed."

The ongoing powerfulness play betwixt the dollar and the EM currencies has near Bitcoin (BTC) without consideration. Its worth has dropped by implicit 50% since November 2021 and remains heavy with risk-on assets.

However, Bitcoin's long-standing antagonistic correlation with the DXY has flipped to affirmative this week. This suggests that a further diminution successful the dollar markets mightiness not needfully trigger a BTC terms betterment successful the adjacent term.

As Cointelegraph reported, calls for a $20,000 macro bottommost and even overmuch lower are increasing louder arsenic Bitcoin struggles to emergence backmost supra the $30,000 mark.

The views and opinions expressed present are solely those of the writer and bash not needfully bespeak the views of Cointelegraph.com. Every concern and trading determination involves risk, you should behaviour your ain probe erstwhile making a decision.

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