In brief
- The dollar index has dropped 11% this year, its sharpest fall since 1973.
- Gold is at record highs signaling U.S. institutions are hedging against inflation.
- A steepening yield curve for bonds points to higher long-term risks and potential support for Bitcoin.
A weakening U.S. dollar, rising governance risks, and yield curve steepening are creating a bullish narrative for Bitcoin, according to a Thursday investment note from Singapore-based QCP Capital.
The U.S. dollar index (DXY), which tracks the value of the U.S. dollar relative to a basket of foreign currencies, has shed 11% of its value since the first half of this year and is currently hovering around 98.23.
“This is the largest decline since 1973–more than 50 years ago,” Stephen Gregory, founder of crypto trading platform Vtrader, told Decrypt.
With gold hitting an all-time high of $3,578 on September 3, Gregory said, “It is evident that U.S. institutions are hedging the declining dollar.” The liquidity from gold is likely to follow into “fixed supply assets like Bitcoin and Ethereum,” he said.
The decline in the U.S. dollar comes amid a bond market sell-off, with experts citing inflation concerns as the primary reason for the surge in 30-year yields across the U.S., the UK, Australia, and Japan.
“It’s really unusual for a 30-year Treasury yield to rise in a Fed easing cycle,” Robin Brooks, a senior fellow at the Brookings Institution’s Global Economy and Development program, tweeted on Wednesday.
Many countries previously shifted their debt issuance to short-term maturities, leading to a global increase in long-term government bond yields, Brooks noted in a subsequent tweet, “a move that may be coming back to haunt us.”
In addition to maintaining a focus on short-term maturities, most central banks worldwide have already begun easing or are anticipating further easing, thereby keeping the front-end anchored.
The recent bond sell-off, however, has widened the gap between short- and long-term yields, steepening the yield curve. In other words, investors are demanding higher returns to lend money for longer periods.
Adding to this complex mix are growing concerns about the Federal Reserve’s independence. President Donald Trump has repeatedly applied pressure to Fed Chair Jerome Powell to lower rates this year, in an effort to service the U.S.’s high levels of interest on its sovereign debt.
According to QCP, that fear is why the premiums remain “higher at the long end, causing the yield curve to steepen.”
A steepening yield curve “signals rising inflation expectations, but it can also signal that investors believe the economy will grow,” Gregory said.
With inflation on the rise, “risk assets like Bitcoin tend to outperform the market,” he explained, “perhaps this is the perfect backdrop for a crypto supercycle.”
Bitcoin’s year-to-date return hovers around 96%, down nearly 11% from its record high of $124,545, CoinGecko data shows. Gold, however, hit an all-time high of $3,578 on Tuesday and is up 35% this year.
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