US dollar retreats from 20-year high - but will DXY topping trigger Bitcoin recovery?

US dollar retreats from 20-year high – but will DXY topping trigger Bitcoin recovery? – Mail Bonus

The US Dollar Index (DXY) has fallen sharply from its dominant bull run over the past two weeks, falling by as much as 3.20% after reaching 105 highs in two decades.

The dollar market is overvalued

The dollar correction over the last two weeks preceded a twelve-month relentless purchase.

In summary, the central bank’s weight against the basket of top foreign currencies increased by 14.3% in one year, primarily as markets sought safe havens against fears of a hawkish central bank and the recent military conflict between Ukraine and Russia.

DXY weekly price card. Source: TradingView

Cash flow among international fund managers increased by an average of 6.1% since September 11, a recent survey of 288 Bank of America’s asset allocators showed. The report also stated that 66% of asset managers believe that global profits will weaken in 2022, which will lead them to maintain an “overweight” liquidity position.

“The market has accumulated huge amounts of dollars in recent months,” Deutsche Bank’s strategist George Saravelos told the Financial Times, adding that it “leads to a very significant overvaluation of the dollar.”

Thus, the recent retreat of the dollar could be a temporary adjustment to neutralize its “overbought” conditions, as the Weekly Relative Strength Index (RSI) also indicated (pictured below).

From a further technical point of view, DXY could fall further towards a rising policy line as support has been limiting its write-downs since January 2021, as shown below.

DXY weekly price card. Source: TradingView

If more sales occur, the index is likely to retreat from its current resistance range, with the next low target at 0.786 Fib close to 100.

Stronger euro outlook

DXY also withdrew earlier this week, with Christine Lagarde, president of the European Central Bank (ECB), adopting a new and more hawkish policy on 23 May.

Lagarde committed to raising interest rates by September 2022, turning away from the ECB’s decades-long monetary policy, which has effectively led to negative interest rates.

As a result, euro area interest rates would fall back to zero, and the outlook for the euro has strengthened against the dollar.

EUR / USD weekly price. Source: TradingView

But even with the continuing Ukraine-Russia crisis and its access to energy being thrown into the hayloft, the eurozone’s confidence in corporate growth remains strong, a recent IFO survey shows. That would mean a higher rise for the euro, which could push the dollar down.

The IFO survey shows confidence in German business confidence. Source: Bloomberg

“It is still too early to say for sure that the dollar is weakening now,” said John Authers, senior editor of Bloomberg Opinion, adding:

“But its decline is another indication that the story of ‘shortage flows and ever-increasing growth’ is being rethought.

EM currencies against Bitcoin

The weaker DXY represents only a declining weight against foreign currencies. But deeper in the valley shows weakening purchasing power in high inflation. The consumer price index (CPI) was over 8% in April 2022.

As a result, the dollar, although stronger than it was a year ago, has not been able to tie the currencies of emerging market countries, thus breaking the negative correlation of those widely observed.

In particular, the yields of the currencies of developing countries such as the Brazilian real and the Chilean peso have been higher than the dollar since January 2022.

BRL / USD and CLP / USD daily prices. Source: TradingView

Euro currencies tend to perform poorly when the dollar rises, mainly because investors see the currency as their ultimate refuge in times of world market uncertainty. But as commodity prices rise due to the crisis in Ukraine and Russia, investors are rethinking their policies.

At the same time, countries that raise their interest rates also create a better investment environment for their currencies, says Stephen Gallo, European head of BMO Capital Markets’ foreign exchange policy.

Excerpt from his statement to the Wall Street Journal:

“Emerging market central banks are being forced to tighten their policies to keep up with the Fed. It’s either that or capital controls being put in place.”

The ongoing power struggle between the dollar and the European Union currencies has left Bitcoin (BTC) regardless. Its value has fallen by more than 50% since November 2021 and still has a lot of risk assets.

Related: Scott Minerd says Bitcoin prices will drop to $ 8K, but technical analysis says otherwise

BTC / USD daily chart showing its correlation with DXY and EUR / USD. Source: TradingView

However, Bitcoin’s long-standing negative correlation with DXY has turned positive this week. This suggests that a further decline in dollar markets could not necessarily trigger a BTC inflation recovery in the near future.

As the Cointelegraph reported, claims for a $ 20,000 macroeconomic bottom and even lower are more intense as Bitcoin struggles to rise above the $ 30,000 mark again.

The views and opinions expressed herein are those of the authors only and do not necessarily reflect the views of Every investment and trading business involves risk, you should conduct your own research when making a decision.