The currently prevailing strict monetary policy of the US Federal Reserve is turning off the dollar tap for the global economy. And with good reason: the inflation rate in the US, even after a small drop, is still at a 40-year high. Less money in circulation should throttle the overheated economy. But there are fears that the Federal Reserve (Fed) could overdo it.
The Indian central bank even believes that the rapid rise in key interest rates could be the third shock to the global economy after the corona pandemic and the Ukraine conflict.
According to the Wall Street Journal, even the United Nations (UN) is now warning of the effects of the particularly strict monetary policy. Is there a reversal of the aggressive interest rate policy in prospect? And will this save the price of Bitcoin and other cryptocurrencies?
Here you get an overview of all important dates on the financial markets of this world in the current week.
Bitcoin and the dollar
In recent months, some financial experts have dubbed the US dollar the “dollar wrecking ball”. With a look at the course of the DXY, i.e. the dollar currency index valued against a basket of other relevant western currencies, it is understandable why. The uptrend of the DXY gained significantly even months before the overdue change in US interest rate policy in March 2022, as the chart impressively shows. NASDAQ tech stocks and Bitcoin fell at the same time as the US dollar outperformed.
Because risk values suffer from the strict monetary policy of the USA, as this increases the yields on American government bonds and thus the dollar exchange rate. When the key interest rate rises in the world’s largest economy, it becomes more profitable for investors to hold relatively safe US government bonds instead of dealing with risky assets.
Dollar strength doesn’t stop at cryptos and tech stocks, however. Larger markets are now suffering from it. The euro recently fell below par with the dollar. Britain and Japan have already felt compelled to intervene against the dollar in the face of massive currency devaluation.
Last week, the Bank of England bought the country’s 30-year government bonds in a bid to stem the currency’s depreciation. Shortly before, the Bank of Japan also pulled the brakes and protected the yen from further devaluation. These measures are actually similar to a loose monetary policy as applied at the beginning of the Corona crisis.
At a conference on trade and development (UNCTAD), the United Nations (UN) warned the Fed directly about the effects of its aggressive interest rate policy on developing and emerging countries, which have to buy expensive dollars for world trade, or debts in US dollars settle
The fear of a global recession seems too great. The UNCTAD Council considers countering supply shocks with demand policies to be a “very dangerous approach”. According to the Council, the US Federal Reserve’s restrictive dollar issuance threatens to bring about “a period of stagnation and economic instability”. The UN therefore called on the Fed to reconsider its aggressive monetary policy for the benefit of the global economy.
Should the economic situation continue to deteriorate, the central bank might then feel compelled to deviate from its course.
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A departure from this policy would probably be a tailwind for all risky markets, but especially for Bitcoin and Co. A temporary recovery in prices would be in prospect, at least in the short term.
The first signs of a pause in the current monetary policy are already being received positively. According to Bloomberg, the sell-off from crypto ETFs came to a standstill in the third quarter.
The crypto analysis platform Messari showed the outright flight of investors to Bitcoin, given the rising devaluation of the euro or British pound. Gold and silver also experienced a strong boost in the past week.
Bitcoin also holds the important price mark around 19,000 US dollars for the time being and thus offers even more arguments for a bottoming out. Robert Kiyosaki, author of the financial classic “Rich Dad Poor Dad”, even sees a great buying opportunity for Bitcoin in the current situation.
However, the crypto market is far from over the mountain. The US Federal Reserve is apparently aware of the impact of its policies on the global economy. Those were the words of Chairman Jerome Powell in his speech at the Jackson Hole Economic Symposium. He said he was ready to face “some pain” to curb high inflation rates. And will probably accept further damage in the process.
After all, loosening monetary policy in the midst of such high inflation numbers actually contradicts all monetary common sense. The “pain” could also show up in the central banks’ decision between price or economic stability.
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