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Conventional wisdom holds that if the dollar is stronger, assets such as cryptocurrencies get cheaper. Yet is that really the case?
This past week, the Federal Reserve did exactly what most people predicted: It raised the fed funds rate by 75 basis points – for the third time in a row. For months now, consumer prices have surged at a rate not seen since the fourth season of Diff'rent Strokes – so raising borrowing costs, it's hoped, will make money a little more expensive and thus cool the hot economy.
Higher interest rates fuel demand for dollars (to put it in terms crypto folks can understand, remember how everyone was buying UST because of the near 20% APYs the Anchor protocol was paying back in April?). The U.S. Dollar Index, which measures the greenback against a basket of six foreign currencies, is now trading north of 112, a 20-year high. A year ago, it was at 93, so the buck has gained about 20%. In that time, bitcoin (BTC) has dropped a whopping 58%.
"Dollar strength is a unilateral and powerful force," said Mark Conners, head of research at 3IQ, on CoinDesk TV's "First Mover" program Friday. "The term 'tsunami' is thrown out a lot, but it really, accurately represents what happens in a period of dollar strength. It just pulls other assets away from currencies."
Nonetheless, it's worth cautioning that one shouldn't read too much into this. After all, crypto is still in its nascent stages compared to other asset classes. It has its own idiosyncrasies and prices move for reasons other than, say, dollar strength.
For example, bitcoin hit an all-time high in November 2021, trading at close to $69,000, more than quadruple where it was the year before. During that time frame, the dollar index went from roughly 92.7 to 95.
Furthermore, prices often appear to move in relation to the market's attitude toward risk. Cryptocurrencies are still very much "risk on."
With that said, crypto has been behaving like some conventional assets, especially in recent weeks.
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