US Dollar Recovers, Bitcoin Holds $20K as Fed Decision Looms

Bitcoin, like gold, has been trading sideways for months, a period of unusually low volatility, but now looks poised to trend upward


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key takeaways

  • After the US dollar sank to three-week lows earlier this week, the currency showed signs of recovery Thursday with the US Dollar Index 0.5% higher
  • The ECB again raised interest rates by 75 basis points Thursday, following eurozone inflation of 9.9% in September

Bolstered by rising equities and a fluctuating US dollar, bitcoin has held its position over $20,000 since Tuesday. It is a key resistance level last hit in early October, but the looming central bank decision and rallying dollar may end bitcoin’s rebound. 

Traders are eager to see bitcoin’s relief run continue. The largest digital currency hovered around $20,600 Thursday morning after briefly approaching $21,000 earlier in the day. The S&P 500 and Nasdaq opened lower, losing 0.2% and 1.4%, respectively. 

“Bitcoin behaves like a commodity,” Nick Saponaro, CEO of blockchain Divi Project, said. “Like gold, it’s a store of value that has utility. So, there’s a demand for it no matter what’s happening in the macroeconomic environment.” 

After the US dollar sank to three-week lows earlier this week, the currency showed signs of recovery Thursday, with the US Dollar Index (DXY) up 0.5%. Bitcoin’s rally came in tandem with the dollar’s decline, as a weakened currency fuels risk-on appetite among investors, according to analysts. 

“Gold gained 0.65% thanks to the weaker dollar and continued drop in yields amid the broader dovish pivot in central bank policy expectations,” Tom Essaye, founder of Sevens Report Research, said.

“There are early signs that both the dollar and rates are beginning to roll over, but until we have more definitive evidence that both are actually peaking, it will be too early to call a bottom in gold,” he said.

Bitcoin, like gold, has been trading sideways for months, bringing uncharacteristically low volatility — the value of the world’s oldest currency in continuous use, the British pound, was almost equally in flux. The digital currency’s volatility compared with the Nasdaq and S&P 500 indexes reached a two-year low earlier this week, according to data from research firm Kaiko. Any significant moves in either direction will be expected to bring volatility expansion.

Inflation and global liquidity

While equity market volatility is starting to lessen — the VIX has fallen to below 30 in the past five days — economists are still worried about global liquidity. 

“After more than a decade of abundant liquidity and relative calm in markets, central bank interest-rate increases to contain inflation have been accompanied by elevated market volatility,” analysts from the International Monetary Fund wrote in a note Thursday. “Measures of market liquidity have worsened across asset classes, especially in recent weeks, as heightened uncertainty about the economic outlook and monetary policy left investors with much less risk appetite.” 

The European Central Bank remains focused on bringing down inflation in the eurozone and, like last month, again raised its primary interest rates by 75 basis points Thursday. In September, euro-area inflation reached 9.9%, according to the ECB.

The Federal Reserve is scheduled to meet next week and give a rate decision on Tuesday. Futures markets are currently pricing in a 91.8% chance the central bank will opt for a 75 basis point hike, according to data from CME Group. Cryptos and equities will benefit from a slow down in hikes, whether it comes in November or December. 

“Markets have rallied on the idea that the worst of the global rate hikes are either one, already behind us, or two, about to be behind us,” Essaye said.

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