Home Forex Market Analysis Dollar Extends Gains at The Expense of Bitcoin and Gold

Dollar Extends Gains at The Expense of Bitcoin and Gold

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Dollar Extends Gains at The Expense of Bitcoin and Gold
  • The US dollar index (DXY) edged up 0.48% in the last 24 hours of trading, sustaining a rally that started Thursday last week. Ordinarily, the dollar bears would have shrugged this sudden rebound off as a dead-cat bounce, but the rising benchmark Treasury yields are unnerving.
  • Benchmark Treasury yields touched a 10-month peak on Monday as most of the market hopes for a major stimulus package by Joe Biden’s government. Further evidence that the greenback’s rebound could hold on for longer is the euro’s pullback on Monday. The euro makes up the largest consideration by weight for the DXY. The EUR was down 1.18% for the five days ended Monday, January 11, 2021.

Risk-on conditions are prevailing in the market

The US Dollar Index (DXY) hit a multi-year high in March 2020 as investors rushed to hoard the greenback in the face of a possible recession caused by COVID-19. The DXY measures the strength of the USD in the global forex market but with emphasis on six currencies from developed economies, like Europe, Japan, and Switzerland. 

In the same month, the US Federal Reserve and other policymakers worldwide initiated aggressive measures to prevent a recession. Between March and July, the Fed had accumulated $4 trillion on its balance sheet. Suddenly, the stimulus packages went from soothing the market to planting fears of inflation.

For the rest of the year, the DXY took a severe beating from the market. By December 30, 2020, the index had shed 12.78% from March’s peak. Meanwhile, other assets that the market deemed as a safe haven (including Bitcoin) rallied. Bitcoin touched an all-time high peak of $27,032 on December 29, 2020.

US Dollar Index (DXY)
Figure 1: US Dollar Index (DXY)

But now, Bitcoin is paring these gains, and bond yields are climbing. On Monday, Bitcoin dropped by as much as 13% to $35,600 after climbing to $42,000 last week. Could the multi-year decline that the market was anticipating for the DXY come to an end?

Most of the drivers of the USD decline are moderating. As we have seen, Bitcoin is paring some of its gains, so is gold. Increased risks are seeing stocks decline, with the S&P 500 closing Monday 0.7% lower to 3,799.61. Nasdaq Composite lost the most points – 165.54 (-1.3%) – to 13,036.43 on the same day. The DJIA also pared by 0.3%.

Under this scenario, one can argue a strong case for a sustained USD rally. The greenback will look to recovery in the job market as a key pillar for its recovery. But if the broad reversal in stocks and commodities continues to firm, the USD could have finally bottomed out.

The behavior of USD/JPY shows risk appetite is coming back

The Japanese yen is a market favorite in times of recession. So, seeing that the USD/JPY pair has seen five days of sustained growth tells that the market is pricing out a recession. But there are two likely scenarios for the pair going forward.

USD/JPY
Figure 2: USD/JPY

Bullish scenario

There are enough buyers to sustain a bullish move if the price action sustains above 103.495. If so, the market is likely to trigger a rally above 104.159. Right now, the 0.382 retracement level is the key resistance that the pair should breach to convince the market that it can sustain a bullish move.

Bearish scenario

The 0.236 retracement level is an important threshold, although the pair has strong support at 102.87. Though unlikely given the current fundamentals, the pair could be headed for a bear market if it breaches 103.495. This is like the midpoint between USD retracing last year’s bear market or bottoming out. 

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