The Dollar Strength Index (DXY) achieved its highest level in nearly 10 months on Sept. 22, indicating growing confidence in the United States dollar compared to other fiat currencies like the British pound, euro, Japanese yen and Swiss franc.
DXY “golden cross” confirmed
Moreover, investors are concerned that this surge in demand for the U.S. dollar might pose challenges for Bitcoin (BTC) and cryptocurrencies, although these concerns are not necessarily interconnected.
U.S. Dollar Index (DXY). Source: TradingView
The DXY confirmed a golden cross pattern when the 50-day moving average surpassed the longer 200-day moving average, a signal often seen as a precursor to a bull market by technical analysts.
Impacts of the recession and inflation risks
Despite some investors believing that historical trends are determined solely by price patterns, it’s important to note that in September, the U.S. dollar exhibited strength, even in the face of concerns about inflation and economic growth in the world’s largest economy.
Market expectations for U.S. gross domestic product growth in 2024 hover at 1.3%, which is lower than the 2.4% average rate over the preceding four years. This slowdown is attributed to factors such as tighter monetary policy, rising interest rates and diminishing fiscal stimulus.
However, not every increase in the DXY reflects heightened confidence in the economic policies of the U.S. Federal Reserve. For example, if investors opt to sell U.S. Treasurys and hold onto cash, it suggests a looming recession or a significant uptick in inflation as the most likely scenarios.
When the current inflation rate is 3.7% and on an upward trajectory, there’s little incentive to secure a 4.4% yield, prompting investors to demand a 4.62% annual return on five-year U.S. Treasurys as of Sept. 19, marking the highest level in 12 years.
U.S. 5-year Treasury yield. Source: TradingView
This data unequivocally demonstrates that investors are avoiding government bonds in favor of the security of cash positions. This may seem counterintuitive initially, but it aligns with the strategy of waiting for a more favorable entry…