US Dollar Surge Dampens Crypto Market Momentum

Increasing short-term strength of the US dollar and ongoing inflationary pressures have begun to clamp down on this year’s bullish trajectory of digital assets


Source: Shutterstock / FOTOGRIN, modified by Blockworks


Rallies in both traditional and crypto-related equities experienced temporary setbacks last week, as benchmark cryptocurrency, bitcoin, ended the session 3.4% lower to $22,930.

Digital assets have taken pause after a 33% increase in total market value year-to-date — from $828.7 billion to $1.1 trillion — driven largely by renewed interest in the asset class in the first quarter.

On-chain analytics platform CryptoQuant told Blockworks bitcoin appears to have bottomed with some valuation metrics suggesting the start of an “early bull stage.” The shift in sentiment is expected to have a ripple effect on the altcoin market as well.

“Altcoins have shown positive performances this year amidst a backdrop of rising on-chain network activity,” said CryptoQuant Senior Analyst Julio Moreno. “The total number of transactions on the Ethereum network has rebounded and is now near the record levels seen in June 2021.”

Market activity in US equities flashed signs of volatility on Friday as participants attempted to make sense of historic low unemployment figures

The S&P 500, which initially attempted a rally, closed the day roughly 1% lower, while the Dow Jones Industrial Average reported a 0.15% dip by the end of the week.

US stocks and crypto continue to be loosely correlated, which became less clear on Sunday as the Spearman coefficient hit its lowest level in two weeks at 0.23. A coefficient of 1 indicates the two assets are moving in tandem, while a dip below 0 signifies they are moving in opposite directions.

US dollar strength bounced back to a three-week high, above 102.9 on Friday, after reaching a nine-month low on Wednesday. The US dollar index has started to gain steam again and is now above 103.3, according to data from the DXY US Dollar Currency Index.

It’s worth noting that this year’s crypto rally has gained momentum alongside a decline in the DXY, meaning a strengthening US dollar against most other currencies could put additional pressure on foreign buyers in the short term.

A strong US dollar can have both positive and negative effects on stocks. On one hand, a strong dollar can make foreign investments more profitable for US-based investors, leading to an increase in stock prices, particularly for multinational corporations and companies that generate a significant portion of their revenue from abroad.

On the other hand, a strong dollar can make US exports more expensive and less competitive in foreign markets, affecting the profits and stock prices of companies that heavily rely on exporting products and/or services overseas.

The Federal Reserve’s recent decision to raise the federal funds rate by 25 basis points marked the eighth consecutive meeting where the policy interest rate has been raised. Further Increases are likely in the coming months as the bank continues its inflation-busting efforts.

Despite the Fed’s projection for rates to peak above 5% and remain there, market sentiment is diverging as investors anticipate rate cuts before the end of the year.

If that market is right, it could bode well for digital assets long-term as participants begin to reallocate a portion of their capital back into the market amid declining rates and a weakening dollar.

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