Crypto Rising as Dollar Dwindles Even Amid Rate Hikes: Cause for Concern?

Historically, rising interest rates make borrowing for short-term business and personal spending more expensive and encourage saving. As the central bank maintained its hawkish stance, money is expected to flow from the crypto sector into fiat savings accounts. The November rate hike, on the other hand, had the opposite effect, with the dollar index falling sharply and crypto gaining ground. Typically, Bitcoin has broken out of the strong dollar effect cycle, and it is becoming more interesting in 2023.

With an inverse relationship, Bitcoin and the US dollar have always ridden on opposite paths. Evidence from the causality in quantiles analysis shows a strong correlation of a coefficient factor -0.9. A strong greenback has always hindered the growth of many assets, including gold. Here is a BTC and USD comparison chart for December 2021 and November 2022.

Speaking at a symposium in Sweden on January 10, 2023, the FED chair said, “…restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.” This state could mean that interest rates are about to continue rising. So, where does the problem come in? Instead of the dollar market reacting positively to such news, it has continued to fall, while the crypto market seems to be getting into a bull-ride! Bitcoin and Ethereum are both up more than 25%, even outperforming XAUUSD.

Since the Bretton Woods System’s inception, the US dollar has been the primary tool of international trade. However, trends are changing with many countries worldwide moving toward de-dollarization, or the process of replacing the USD as the main currency of cross-border trade. Economies are doing so in various ways, including decreasing US debt holding and reducing their reliance on the dollar and the SWIFT system. China and Russia have been at the forefront of the de-dollarisation movement, encouraging trade in their respective currencies.

Things are becoming more challenging for the dollar now that cryptocurrencies face wide acceptance globally. They are seen as a safe way to evade sanctions and facilitate safe international trade as compared to the dollar, whose use is highly influenced by what the US thinks about a particular country.

Central Bank Digital Currencies are taking shape across several economies, including India, Russia, and China. Russia is already in talks with Iran to launch a stablecoin backed by gold to facilitate trade in the Persia region. All this is evidence of massive crypto demand, explaining why the digital coin market’s value may soon have little or no relationship with the USD. On the other hand, it leaves questions about the dollar’s future. As of writing this, the dollar index is down more than 40% from 114 area to 104 regions, while BTC and ETH are trading at above $23,000 and $1,600 respectively.