Key Takeaways:
The value of the world’s largest cryptocurrency by market capitalization fell by 4% to $66,500 during Asian trading hours on Tuesday as the dollar index rose above 105.00 for the first time since November 2023.
Strengthening Dollar Causes Bitcoin Prices to Further Consolidate
Bitcoin’s drop comes amid a recent week-long consolidation between $68,000 and $72,000, as per data from CoinDesk. Meanwhile, the broader crypto market also experienced losses, with Ether (ETH), Solana (SOL), and Dogecoin (DOGE) leading the charts in terms of declines.
The dollar index, which calculates the US dollar’s value against major fiat currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc, crossed the 105 mark for the first time in four months, recording a four-week gain of 2.58%.
Dollar-denominated assets like Bitcoin and gold become expensive when the dollar gains in value, potentially leading to lower demand. Furthermore, sustained dollar strength is known to trigger financial tightening by global central banks, further denting investors’ willingness to take risks.
Manufacturing Activity Across the US is up for the First Time Since September 2022
According to the manufacturing Purchasing Manager Index (PMI) report released by the Insitute for Supply Management (ISM) on Monday, manufacturing activity across the US rose unexpectedly picked up pace last month, growing for the first time since September 2022.
The PMI rose 2.5% from February’s 47.8 basis points (bps) reading to reach 50.3 bps in March. The headline figure crossing into expansion territory above 50 bps brings an end to 16 consecutive months of dollar contraction.
ISM’s New Order Index – which shows the number of new orders from customers of manufacturing firms – also moved back into expansion territory. Meanwhile, the price index went up 3.3% from February’s 52.5 bps to 55.8 bps last month.
Stronger Dollar Diminishes Chances of Interest Rate Cuts
However, a strengthening dollar weakens the case for interest rate cuts by the US Federal Reserve. Bloomberg reported that the amount of Fed rate cuts priced into swap contracts for this year has declined to less than 65% following the release of the latest manufacturing report.
The market now expects the central bank to walk back on its claims of 25 bps rate cuts for 2024. It was earlier assumed that the Fed would announce its first rate cut in June, the chances of which has now dropped below 50%.
In a note to clients, analysts at Dutch bank ING said that Monday’s report would make Fed officials “wary of committing to significant policy easing”. They also highlighted that markets are heavily focused on the ISM report, while 10-year Treasury yields are up 10 bps on the back of the return of manufacturing growth and higher inflation readings from the sector.
Some analysts believe that the Federal Reserve will be forced to cut rates rapidly due to the soaring US fiscal debt, which totaled $26.2 trillion at the end of 2023 and counts for 97% of the country’s gross domestic product (GDP).
However, such a case scenario offers a major bullish tailwind to the price of cryptocurrencies.
The Fed kickstarted its efforts to tame inflation by hiking interest rates in March 2022, which rose from zero percentage points to 5.5% in the 16 months ending July 2023. The monetary tightening was partly responsible for Bitcoin’s price crashing by 80% in 2022.
Bitcoin Could Face More Volatility in the Coming Weeks
The apex cryptocurrency could be in for a volatile few weeks as several US job reports are lined up in the coming days, including Friday’s nonfarm payrolls and the unemployment rate figure. To top it all off, the Bitcoin blockchain’s four-year mining reward halving event is due later this month, which could also affect its price.
At the time of writing, Bitcoin (BTC) is trading at $66,000 – down 0.8% in the last 24 hours.
