Just as BTC tries to steady, the dollar index wakes up

Bitcoin’s BTC$78,411.10 price sell-off has paused in the last 24 hours. However, prospects for a long-lasting recovery look dimmer as the dollar index springs back to life, threatening to squeeze crypto prices.

Prices for the leading cryptocurrency by market value have stabilized between $75,000 and $80,000 after a weekend decline that saw valuations drop from $85,000 to under $75,000. Some observers are pinning hopes on futures market dynamics to trigger a recovery above $80,000.

While that’s possible, sustainability is called into question as the dollar index, which tracks the greenback’s value against major fiat currencies, is buoyant. Some experts expect the dollar to stay bid in the near term.

A stronger dollar raises the opportunity cost of holding greenback-denominated assets, such as bitcoin, gold, and commodities. All things being equal, a rising DXY is typically bearish for BTC. Furthermore, a stronger dollar often leads to financial tightening—the flow of money and credit through the global economy becomes more costly, disincentivizing risk-taking in financial markets.

The DXY has risen 1.5% to 97.60 in two days, registering its best two-day gain in 9 months, according to data source TradingView. The renewed upswing is likely being fueled by fears that the incoming Federal Reserve President, Kevin Warsh, will be slow to cut interest rates, consistent with his reputation as a “policy hawk” earned during his term as Fed governor from 2006-2011.

“The dollar is looking healthier. The de-basement trade that seemed primarily behind the USD plunge of the past week has started to unwind since Kevin Warsh became U.S. President Donald Trump’s nominee for Federal Reserve Chair,” analysts at ING said in a note to clients.

Analysts added that the upcoming U.S. macroeconomic data releases, especially the nonfarm payrolls (jobs) report, could add fuel to the dollar recovery. The jobs report, initially scheduled for Feb. 6, has been delayed due to the partial federal government shutdown.

“Our call is for 80k payrolls and unchanged 4.4% unemployment, which can set the stage for a further stabilization/recovery in the dollar,” analysts noted.

Matthew Ryan, head of market strategy, said that the USD bounce could have more room to run.

“While Warsh has recently aligned himself with Trump in calling for a lower fed funds rate, the fact that he was previously seen as a hawk during his stint as a Fed governor in the late-noughties means that he is probably less likely to advocate for aggressive cuts than Messrs Hassett and Reider,” Ryan explained in a blog post on FXStreet.