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US dollar soars as GDP contracts


The strengthening US dollar and deteriorating growth in major global economies will likely lead to further declines in risk assets.

Revisiting the Dollar Bitcoin Relationship

In more recent issues, we’ve highlighted that over the past several months, bitcoin’s price has been a function of broader macro conditions of rising yields and unwinding credit, leading to heightened equity market volatility and a rise in the price of bitcoin. American dollar.

Lately, the Dollar Currency Index (DXY), which tracks the relative strength of the US dollar against other key global currencies, hit new 20-year highs as major currencies like the euro, Japanese yen and the sterling continue to weaken. The latest rise comes as the Bank of Japan triples its efforts to control the yield curve, buying an unlimited number of 10-year bonds each business day to cap yields at 0.25%.

DXY Strength Against Other Weakened Currencies

So what does a rising DXY mean for bitcoin and other assets? Even with the devaluation of the dollar against real goods, services, and financial assets, all debtors are forced to sell US dollar-denominated assets to cover their debts during deleveraging events.

Today we also get the latest US gross domestic product (GDP) data for the first quarter of 2022 showing the economy contracted 1.4% versus the consensus expansion of 1.1%. Deteriorating growth in major global economies that will usher in a shift in market regimes towards a more deflationary environment later this year has been a key assumption in our base case for expecting a further decline in risk assets in 2022.

If we are to see broader market expectations for growth reduced further this year, that change is likely more negative for risk assets.

US dollar soars as GDP contracts
US GDP contracts as economy deleverages

Final remark

In our view, the worst is yet to come for markets and bitcoin. That said, the kind of credit unwind and deleveraging we’re facing today is one of the main reasons we expect bitcoin’s case to grow in the market as these events unfold. .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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