U.S. Dollar Rises as Fed Keeps Interest Rates Low; Places Pressure on Bitcoin

The newly released minutes from the Federal Open Market Committee’s July 28 and 29th meeting has sent shockwaves through the global financial markets, not stopping at Bitcoin’s price action.

The overall tone of the meeting was grim, with committee members expressing concerns over how the ongoing pandemic may stunt long-term economic growth in the U.S. and abroad.

During the meeting, the Fed’s policymaking arm decided to hold off on making any changes to short-term interest rates, keeping them near zero as the virus continues “weighing heavily” on the domestic economy.

This provided the U.S. dollar with a short-term boost, while “hard assets” like Bitcoin and gold both shed some of their recent gains.

The dollar’s appreciation may prove to be fleeting, however, and data suggests that an imminent decline may fuel a strong Bitcoin uptrend.

Latest Fed Meeting Sends Shockwaves Through Markets

Despite the stock market erasing virtually all of the losses that came about as a result of the March meltdown, the underlying economy is showing signs of weakness, according to the Federal Reserve.

Committee members participating in the meeting stated that the economy has struggled to reach its pre-pandemic levels. 

The minutes reveal that the Open Market Committee is fearful the ongoing health crisis could “weigh heavily on economic activity, employment, and inflation in the near term,” also posing “considerable risk” to the mid-term economic outlook.

Their inflation-related concerns come as the Fed’s balance sheet remains at record highs of nearly $7 trillion USD, while government spending ramps up as discussions of another round of economic stimulus continue.

Interest rates remaining anchored around zero seem to have outweighed investor concerns regarding imminent inflation, as the dollar was able to gain on the news. The US Dollar Index (DXY) saw a slight jump from lows of $92.15 on Wednesday to highs of $93.20.

In tandem with the dollar’s upswing, hard assets like Bitcoin and gold both shed a portion of their recent gains. 

The BTC Times first reported on the inverse correlation between Bitcoin and the U.S. Dollar earlier this month. This latest bout of volatility only further confirms this concept, which can be seen while looking towards the below chart. 

Inverse BTC/USD Chart Compared with US Dollar Index. Source: TradingView

Here’s What May Come Next for Bitcoin, Gold, and the U.S. Dollar

Analysts don’t expect the U.S. dollar’s ongoing upswing to last too much longer due to imminent inflation. 

Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, told Bloomberg that the dollar has been overvalued “for a long time,” and that he expects it to see further downside in the mid-term.

“A policy or economic shock can quickly change the currency’s trajectory and that’s what seems to be happening thanks to the Fed’s swelling balance sheet, a surge in debt, and the way we handled the pandemic.”

Given the inverse correlation between Bitcoin and the dollar, this macro decline in the dollar’s value could fuel a strong Bitcoin uptrend while also bolstering other hard assets like precious metals.

SkyBridge Capital, an investment fund with $7.35 billion USD under management, is specifically betting big on gold, noting that the dollar’s demise will shift the global focus onto “alternative” currencies. The fund’s senior portfolio manager is setting his sights on a movement towards $2,200 USD by the end of 2021.

“It wouldn’t surprise us if by the end of next year, it’s around the $2,100-to-$2,200 USD range.” 

 This would mark a roughly 10% climb from its current price levels, being emblematic of the surging demand for hard assets.