This Is Why Crypto Prices Are Benefiting From Dollar Index Weakness That Could Continue All Year

Jimmy Aki
Last updated: | 3 min read

Disclaimer: The Industry Talk section features insights by crypto industry players and is not a part of the editorial content of Cryptonews.com

For the past few months, cryptocurrency prices have relatively gone in the inverse direction to the U.S. dollar. And as inflation begins to ease, the U.S. Dollar Index (DXY) has also seen losses. Here’s why coin prices are benefiting from this reversal and what investors might expect. 

Fed Monetary Policy Affects Dollar Index

At press time, the U.S. Dollar Index currently stands at 102.31. The Index is experiencing a downtrend of 0.23% in the past 24 hours, further continuing the greenback’s slide against other major currencies. Already, the Japanese yen is looking especially attractive to investors, with the currency hitting a seven-month high against the greenback. 

The drop in the dollar value is coming as investors’ risk appetite starts to grow once more. All through 2022, inflation was the biggest issue in the United States as the Federal Reserve looked to quell monetary supply following stimulus spending amid the coronavirus pandemic. 

To control inflation, the Fed embarked on several interest rate hikes to remove money from circulation and prevent everyday citizens from spending too much. While it was a long and arduous journey, this policy started to yield results towards the home stretch of 2022. By December, the government had reported a Consumer Price Index (CPI) drop of 0.1% for the month. This brought inflation back to 6.5%, down from 7.1% a month earlier. 

Many investors are encouraged by the drop in inflation because they believe the Federal Reserve will be more willing to ease its tightened monetary policy and provide a more welcoming environment for them to borrow money and access capital. This has led to more investors seeking out risky assets, especially cryptocurrencies. 

Crypto Prices Soar as CPI Cools 

As explained earlier, the prices of cryptocurrencies have moved inversely to that of the dollar. And as the greenback slides, crypto has only soared. 

The broader crypto market has seen a massive boost, currently holding a value of $990 billion. It crossed the trillion-dollar mark last week, and while it has since retraced, investors remain confident that a surge is on the way. 

In the past week alone, most large-cap coins have posted double-digit gains. Bitcoin has moved out of the “Fear” region on the Bitcoin Fear & Greed Index – the first time it achieved this in nine months.   

It is also worth noting that this rally has come with minimal help from institutions. According to CryptoQuant’s Fund Holdings Index, the total amount of BTC held by crypto holdings such as trusts, exchange-traded funds (ETFs), and others has dropped significantly in recent months. And even with the current market surge, this hasn’t increased quite yet. 

A market analyst opined that institutions might be buying through over-the-counter (OTC) markets. He further added that institutions seem to be resting and watching for now. 

All Eyes on the Fed

As for whether this surge will continue in the near term, no one particularly knows. Investors are currently acting on optimism that the Federal Reserve will slash interest rates this month. 

So far, the Fed has yet to make any indications about its actions. While it has claimed that a reduction in interest rates is on the cards, its focus remains on doing what is best for the economy. And if interest reduction is against that, it won’t go ahead. 

All eyes will be on the Federal Open Market Committee Meeting (FOMC) at the end of the month. 

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