Bitcoins price sale has been paused for the last 24 hours. But prospects for a sustained recovery look dimmer as the dollar index springs back to life and threatens to pressure crypto prices.
Prices for the leading cryptocurrency by market capitalization have stabilized between $75,000 and $80,000 after a weekend slump that saw valuations fall from $85,000 to below $75,000. Some observers are hoping for momentum in the futures market to trigger a rally above $80,000.
While possible, sustainability is being questioned as the dollar index, which tracks the dollar’s value against major fiat currencies, is strong. Some experts expect the dollar to remain tender in the short term.
A stronger dollar increases the opportunity cost of holding greenback-denominated assets, such as bitcoin, gold and commodities. All things being equal, a rising DXY is typically bearish for BTC. Moreover, a stronger dollar often leads to financial tightening – the flow of money and credit through the global economy becomes more expensive, discouraging risk-taking in financial markets.
DXY is up 1.5% to 97.60 in two days, recording its best two-day gain in 9 months, according to data source TradingView. The renewed rally is likely driven by fears that incoming Federal Reserve President Kevin Warsh will be slow to cut interest rates, in keeping with his reputation as a “political hawk” earned during his tenure as Fed governor from 2006-2011.
“The dollar is looking healthier. The bearish trade that appeared to be primarily behind the USD plunge over the past week has begun to relax since Kevin Warsh became US President Donald Trump’s nominee for the Federal Reserve chair,” analysts at ING said in a note to clients.
Analysts added that upcoming US macroeconomic data releases, particularly the non-farm payrolls (jobs) report, could add fuel to the dollar’s recovery. The jobs report, originally scheduled for February 6, has been delayed due to the partial shutdown of the federal government.
“Our call is for 80,000 payrolls and unchanged 4.4% unemployment, which could set the stage for a further stabilization/recovery in the dollar,” analysts noted.
Matthew Ryan, head of market strategy, said the USD bounce could have more room to run.
“While Warsh has recently joined Trump in calling for a lower Fed Funds rate, the fact that he was previously seen as a hawk during his tenure as a Fed governor in the late 1900s means he is likely less likely to advocate aggressive cuts than Hassett and Reider,” Ryan explained in a blog post on FXStreet.
