The Bitcoin rally is not enough to dethrone the strong 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 begin to accept bitcoin, this will only lead to further increases in demand in a market with limited supply,” Fawad Razaqzada, an analyst at ThinkMarkets, wrote in a note to clients.

“Bitcoin is becoming an alternative asset,” said Brad Bechtel, global head of FX at Jefferies. “It is not correlated with anything else on the market.”

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

This is quite optimistic about bitcoin’s long-term outlook, even though some, especially Bank of America, have called the crypto rally “the mother of all bubbles.”

But don’t turn all the dollars you earn into bitcoin yet.

The US dollar is the world’s reserve currency, which means that companies, countries and central banks keep it in their accounts. It is also the most widely used currency in transactions around the world.

Of course, the euro and the Chinese yuan have become more popular in recent years, and cryptocurrencies have arrived on the scene. But for now, there is nothing to beat the dollar’s status.

Bitcoin grew by more than 30% in February alone – an impressive increase. But “this kind of price action is the exact 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 a risk.”

Reserve investors, such as central banks, are not looking for the highest return. Instead, look for value-added investments. And while bitcoin’s volatility may decline as the cryptocurrency market matures, it hasn’t.

Another reason Bitcoin is not about to become the world’s reserve currency is that it is not really a currency, Chandler wrote on his blog. “[Cryptocurrencies] they do not meet economists’ definition of money: a medium of exchange, a deposit of value and a unit of account, “he said.

Weaker dollar under Biden

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

President Donald Trump has repeatedly expressed a desire to get a weaker dollar when in office, but global trade tensions and geopolitical fluctuations have increased its safe haven status and made the dollar attractive to investors.
Conditions look a little different for President Joe Biden, and the greenback could weaken as a result of the new administration’s economic agenda, including more government stimulus.
Interest rates are now very low, and the Federal Reserve reported that they will remain there until recovery is underway. This makes the American currency less attractive to investors.

US Treasury yields, which live up to interest rate expectations, have recently ticked in hopes of a faster economic recovery. But economists at Capital Economics do not believe this trend will continue, given the Fed’s position on low rates.

The launch of the vaccine combined with continued government support could lead to a mini-economic boom in the summer and could lead more optimistic investors to take risks. This would be bad for the very safe US dollar, as these investors could favor riskier currencies.

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