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The dollar index (DXY) hit 101 on June 23, marking the highest level seen since May last year. The reason for why it’s climbing matters a lot for crypto. Rather than a pure safe-haven bid due to the situation in the Middle East, this rise could be the indication that the Federal Reserve is finished cutting and could start hiking again.
Bitcoin felt the pinch right away. The latest news coming out of the Fed on future interest rate decisions have resulted in BTC slipping below the $63K region and now trading below $62.5K. The DXY tracks the greenback against a basket of major currencies, and a move to 101 reverses most of last year’s weakness in one stretch.
Analysts and traders have been looking at the dollar’s strength based on what’s happening with regards to the Iran-US conflict. The U.S. and Iran are moving toward a 60-day ceasefire agreement wherein talks will proceed to reach a final deal between the two sides. The price of crude has fallen sharply to around $76, a level not seen since early March. The energy shock that rattled markets across the globe is dissipating.
What’s happening now is that the dollar is going up even as fears around the war ease. If the bid had really been about Iran, the opposite should have happened. Strip out the geopolitics and what’s left is rate expectations, and those have turned sharply hawkish.
Nine Fed Officials Now See a Hike Under Warsh
The tone around future interest rate projections in the Fed has changed dramatically under new chair Kevin Warsh. Nine out of nineteen officials now see this year having at least one rate hike on the cards. May inflation came in at 4.2%, more than double the 2% target, and that figure is carrying a lot of weight in the latest projections.
The odds of a hike sit at 70.3% by September, 78.3% by October, and 86.1% by December. Not long ago the debate was about how many cuts were coming. Now it’s about how many hikes.
Source: CME Group
Dollar Strength Hits Bitcoin Hardest When It’s About Rates
Bitcoin is priced in dollars, so a stronger dollar makes BTC more expensive for anyone holding euros, yen, or won. A rising dollar also tends to signal tighter liquidity and higher yields, which pulls money toward cash and Treasuries and away from assets that throw off no income.
That inverse link is loose most of the time. It gets much tighter in one specific case, which is when the dollar is climbing on rate expectations instead of fear. That’s the exact setup now. The dollar isn’t rising because investors are scared. It’s rising because they think money is about to get more expensive, and that’s the version of dollar strength Bitcoin handles worst.
ETF Outflows Are Doing Real Damage
Spot Bitcoin ETFs have flipped from tailwind to drag. Bitcoin spot ETFs have now registered seven consecutive weeks of outflows according to data from SoSoValue. Since the week of May 15, $6.01 billion have flowed out of Bitcoin Spot ETFs. The same products that helped BTC with the ascent to new highs are now speeding up the downturn, and redemptions at that scale force selling regardless of where conviction sits.
Source: SoSoValue
For BTC, a close above the $62K zone is the level to watch which also aligns with the 200-week simple moving average. Almost everything lining up against it right now traces back to one source, a Fed the market suddenly believes is about to tighten. The bull case needs that conviction to crack first.
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