The Bitcoin rally is not enough to dethrone the powerful dollar

The Bitcoin rally is not enough to dethrone the powerful dollar

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Bitcoin rose about 5% on Tuesday afternoon, while the US dollar index fell 0.6%.

“As more and more companies start accepting bitcoin, it will only lead to a further increase in demand in a limited market,” ThinkMarkets analyst Fawad Razaqzada wrote in a comment to customers.

“Bitcoin is becoming an alternative asset,” says Brad Bechtel, world head of FX at Jefferies. “It’s not related to anything else in the market.”

And that makes it an attractive asset to add to a portfolio, Bechtel said.

This is quite positive for the long-term outlook for bitcoin, even though some, especially Bank of America, have called the crypto rally ‘the mother of all bubbles’.

But do not turn all your hard earned dollars into bitcoin yet.

The US dollar is the world’s reserve currency, meaning companies, countries and central banks keep it in their account. It is also the currency most used in transactions around the world.

The euro and China’s yuan have become more popular over the past few years and cryptocurrencies have come on the scene. But for now, there is nothing to conquer the status of the dollar.

Bitcoin jumped more than 30% in February alone – an impressive increase. But ‘that kind of price action is exactly the opposite’ of what reserve investors are looking for, ‘Marc Chandler, chief market strategist at Bannockburn Global Forex, told CNN Business. “Instead of making it more attractive as a reserve asset, it makes it less attractive because volatility is risk.”

Reserve investors like central banks are not looking for the biggest returns. They rather look at value-saving investments. And although the volatility of bitcoin may decline as the cryptocurrency market matures, so far it has not.

Another reason why bitcoin is not going to become the reserve currency in the world is that it is not really a currency, Chandler wrote on his blog. “[Cryptocurrencies] does not meet the economists ‘definition of money: a medium of exchange, a value store and a unit of account,’ he said.

Weaker Dollar Under Biden

The reserve status of the US dollar may not be in danger yet, but there is a good chance will continue to weaken in the short term.

President Donald Trump has repeatedly expressed his desire for a weaker dollar while in office, but global trade tensions and geopolitical upheavals have raised safe haven status and made the dollar attractive to investors.
Conditions for President Joe Biden look a little different and the greenback could weaken due to the new government’s economic agenda, with more stimulus from the government.
Interest rates are now ultra low and the Federal Reserve indicated that they would stay there until the recovery was well underway. This makes America’s currency less attractive to investors.

U.S. Treasury yields, which follow interest rate expectations, have recently increased amid hopes of a faster economic recovery. Capital Economics economists do not think this trend will be the last, given the Fed’s position on low rates.

The deployment of vaccines, coupled with continued government support, could lead to a small economic boom in the summer and lead more optimistic investors to take a risk. This would be bad for the super safe US dollar, as investors could favor riskier currencies.

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