US Dollar Surge Destroys The Crypto Market’s Momentum.
A growing strength in the short-term in the US dollar, and the constant inflationary pressures have started to limit the bullish trend of digital assets.
The rally in both traditional and crypto-related stocks experienced temporary losses last week, while bitcoin, the most popular cryptocurrency, was the last to close the session 3.4 percent lower at $22,930.
Digital assets have seen an extended hiatus following the 33% rise in market value total year-to-date -increasing from $828.7 billion to $1.1 trillion, mostly due to increased enthusiasm for the class during the beginning of the quarter.
An on-chain analysis platform CryptoQuant stated that Blockworks bitcoin has reached a bottom, with certain valuation metrics that suggest an “early bull phase.” The change in the market’s sentiment is likely to be a ripple effect for the market for altcoins as well.
“Altcoins have had a positive performance this year, despite a backdrop of increasing activity on the blockchain,” said CryptoQuant Senior Analyst Julio Moreno. “The total amount of transactions that occur on Ethereum has increased.” Ethereum network has increased, and is currently near record highs which were seen in June of 2021.”
The market activity in US equity markets showed indications of volatility on Friday as participants tried to comprehend the historic low unemployment numbers.
The S&P 500, which initially tried to rally, ended the day around 1 percent lower, while the Dow Jones Industrial Average reported an 0.15 percent drop towards the end this week.
US crypto and stocks remain in a loose correlation but this was less evident on Sunday when the Spearman coefficient reached the lowest level in 2 weeks, at 0.23. A Spearman coefficient of 1 signifies that both assets are in sync and a dip of 0.20 indicates that the two assets are moving in different directions.
US dollar strength rebounded to a record three-week high just above 102.9 in the last day of Friday following hitting a low of nine months on Wednesday. In the meantime, the US dollar index is beginning to increase in value and is currently above 103.3 as per information obtained from DXY US Dollar Currency Index.
It’s important to note that the cryptocurrency rally of 2017 is gaining momentum in conjunction with the decline of the DXY. This means that a rising US dollar in comparison to other currencies could increase stress on buyers from abroad in the near long term.
— Blockworks (@Blockworks_) February 6, 2023
The strength of the US dollar can have positive and negative impacts on stock prices. On the other side, a strong dollar can make foreign investment more lucrative for US-based investors which can lead to an upswing in prices for stocks specifically for multinational corporations and firms that earn a substantial portion of their income from overseas.
However, an overvalued dollar can create US exports more expensive and less competitive on international markets, which can impact the profit margins and prices of businesses which heavily depend on exporting their products or services abroad.
This week’s Federal Reserve decision to raise the Federal Funds rate by 25 basis points was the eighth meeting in a row where the interest rate for policy was increased. More increases are expected in the next few months as the Federal Reserve is continuing its efforts to reduce inflation.
Despite the Fed’s forecast that rates will rise above 5 percent and then remain at 5%, the market’s sentiment is diverging as investors are awaiting rate cuts prior to the close this year.
If the market is in place it could be a good sign for digital assets in the long run when participants begin to transfer part or their money back to the market in the face of declining rate and weakening of the dollar.