The Dollar Index (DXY) is down 1.4% this month and 11% from September’s peaks, due to US inflation, slowing growth, and a shift in Fed tightening bets for 2023 and 2024. Despite the central bank’s intentions to keep rates high, markets expect the Fed’s interest rate to stay around its current level for the next 2 years.
The market’s more tolerant view is helping crypto markets in early 2023, with Bitcoin and Ethereum up 40% and many altcoins seeing huge gains. With other central banks becoming more prudent, the prospect of further US dollar losses and crypto gains looks more obvious.Â
Long-term, the dollar may face a larger headwind with de-dollarization, as countries and rival superpowers like China and India move to pay for commodities in their own currencies rather than the US dollar.
Zoltan Pozsar
Despite the central bank’s efforts on keeping rates above 5% for a long time, the market doesn’t react and its reflected by the 2-year yield at 4.2%, suggesting that the Fed’s interest rate is expected to remain at its current level for the next two years, instead of an expected 100 bps increase.
What Happens with Crypto if the Dollar Drops
If the US dollar is used less in trade and surplus dollars are recycled less into traditional assets like Treasuries, the dollar’s status as the international reserve currency could be under threat.
This could increase US borrowing costs and the implications for crypto are uncertain. It could harm crypto status, but if CBDCs react and steps in as a control tool, that could strengthen the case for decentralized blockchain-based alternatives.
The current economic climate has seen the dollar become increasingly volatile, making it difficult to rely on as a reliable currency. At the same time, digital currencies such as Bitcoin and Ethereum have gained tremendous traction in recent years.
This suggests digital assets may be poised to overtake traditional paper money in value and adoption alike. This shift could have implications for governments around the world and is a final wake-up call for the US government to recognize the true potential of cryptocurrencies.
The Dollar Status as the World’s Reserve Currency
The fall of the dollar is largely due to its declining purchasing power but also because of its over-reliance on debt. With America’s national debt recently increasing to nearly $27 trillion, it’s becoming increasingly clear that this amount of debt cannot continue indefinitely without jeopardizing global markets, investments, and even global trust in America’s economy.
As a result, more people are turning towards cryptos as a stable store of value that can’t be affected by market instability or economic downturns.Â
Cryptocurrencies offer numerous advantages over traditional currencies as they’re decentralized and independent from any government or central bank control. They also allow users to transfer money quickly, securely and cheaply across borders with minimal fees compared to traditional banking systems.
The rapid growth of crypto use presents an enormous challenge for US regulators who need to find ways to keep up with rising demand while ensuring user safety and protecting against fraudulent activity.
There needs to be greater clarity regarding taxation laws related to cryptocurrencies so investors can make informed decisions about their finances without fear of penalties from Uncle Sam down the line.Â
Final Word
Cryptos provide a unique opportunity for both individuals and governments alike if properly managed correctly which is why it’s essential for US officials to begin taking steps towards adapting policies surrounding crypto regulation sooner rather than later.
The success or failure of this endeavor will ultimately determine whether cryptos become mainstream financial instruments in the United States or not; either way, it’s clear that we’re now living through a pivotal moment in history where technology is emerging faster than governments can keep up with it-a wake-up call for anyone still operating within an outdated framework.
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