Dollar Up, Rates Up, Crypto Down Short-Term

During Tuesday’s session, Bitcoin (BTC) experienced a decline in value as optimistic U.S. manufacturing data propelled the dollar index (DXY) to its highest point since mid-November. The premier cryptocurrency saw a >5% drop to $64,521, ending its week-long trading range between $68,000 and $72,000. This downturn was mirrored across the crypto market, with Ether (ETH), Solana (SOL), and Dogecoin (DOGE) facing sharper declines, while and aggregate crypto index dropped almost 8%.

The dollar index, a measure of the U.S. dollar’s strength against a basket of major currencies, surpassed the 105 level, marking a 2.58% increase over four weeks. This strengthening of the dollar renders assets priced in dollars, like bitcoin and gold, more costly and potentially less attractive, leading to reduced demand. Additionally, a persistently strong dollar can contribute to global financial tightening, diminishing the appetite for risk among investors.

Following the release of the manufacturing report, the expected Federal Reserve rate cuts for the year, as inferred from swap contracts, decreased to under 65 basis points, indicating a shift in market expectations away from the Fed’s initial prediction of three 25-basis point cuts in 2024. The likelihood of a rate cut in June has fallen below 50%, as per Bloomberg.

Analysts are closely watching the ISM manufacturing report, noting that a resurgence in manufacturing growth and increased inflation figures have driven 10-year Treasury yields up by 10 basis points. With numerous Federal Reserve officials set to speak throughout the week, there is speculation that the latest economic data might cause hesitation towards significant monetary easing, according to a note from ING analysts.

However, some analysts posit that the growing fiscal debt may eventually compel the Federal Reserve to enact rapid rate cuts, potentially providing a substantial bullish momentum for cryptocurrency prices. The Fed’s interest rate hikes from zero to 5.5% over 16 months up to July 2023, aimed at controlling inflation, were a factor in Bitcoin’s 80% price downturn in 2022.

Moving forward, Bitcoin’s price could see continued volatility with several key employment reports due this week, including the nonfarm payrolls data and the unemployment rate on Friday. Additionally, the Bitcoin blockchain is approaching its quadrennial mining reward halving later in the month, which could have significant implications for the cryptocurrency’s value.