- The US dollar index has pared back most of its losses this year.
- Federal Reserve hawks believe that interest rates will keep rising.
- The US published strong inflation and retail sales data.
A lot has happened in the financial market this week, pushing the US dollar index (DXY) to the highest level since January. It was trading at $104 on Friday, about 3% above the lowest point this year. If this trend continues, it could hit cryptocurrencies like Bitcoin, Polkadot, Tron, and Internet Computer.
Strong US retail sales and inflation data
The main reason for the strong US dollar index comeback is the strong economic numbers that were published this month. Let me take you back. In the first week of the month, the US published strong jobs numbers, which showed that the economy added over 504k jobs in January. The unemployment rate dropped to 3.4% while wage growth held well.
This week saw a series of additional strong numbers. It started on Tuesday when the Bureau of Labor Statistics (BLS) published the relatively strong consumer inflation data. The numbers showed that the headline consumer price index (CPI) rose to 0.5% on a month-on-month basis. Core inflation also rose slightly.
On Wednesday, the US published strong retail sales numbers. The headline retail sales jumped by 3% in January, the biggest monthly increase in more than a year. Finally, on Thursday, data showed that the producer price index (PPI) remained steady in January.
Fed hawks point to more hikes
Therefore, these numbers meant that the Fed could continue hiking interest rates, which is a positive catalyst for the US dollar index (DXY). In fact, several Fed officials have hinted that the bank will likely hike by 0.50% in March. On Friday, Michelle Bowman, a well-known hawk said:
“I don’t think anyone can argue that inflation is much too high. I think we’re seeing a lot of really inconsistent data in the economic conditions. We’re not finished yet. We haven’t beaten inflation.”
Other hawks like Loretta Mester and James Bullard have hinted that they will support a 0.50% rate increase. In multiple statements, analysts at Goldman Sachs and Bank of America also said that they expect that the Fed will extend their hikes to June. They expect that the terminal rate will rise to between 5.25% and 5.5%.
US dollar index impact of crypto prices
A hawkish Federal Reserve means that the US dollar index could continue soaring. Analysts at ING, who are moderately dovish, believe that the DXY index will surge to about $106.5.
If this happens, it could have an impact on crypto prices. In most periods, cryptocurrencies like Bitcoin and Ethereum tends to underperform in a period when the US dollar is extremely strong.
We saw that in 2022 when Bitcoin price plunged as the DXY index surged to the highest level since 2000.
