The US dollar remains the leading currency in international reserves with a share of 59% at the end of 2020 and the leading means of payment with a share of 39% in international settlements for February 2022. The change in the Fed’s policy affects regional markets around the world and sometimes leads to full-scale crises.
Thus, emerging market economies owe over $100 billion to the IMF alone. In the case of an increase in the value of the dollar, the debt burden also increases (due to the weakening of the national currency). This has already led to a default in Sri Lanka, and ahead of difficulties with settlements on foreign loans from Ghana, Tunisia, Egypt, Pakistan and El Salvador.
This digression is intended to demonstrate the strong dependence of the global economy on the Fed’s policy, and the cryptocurrency market with an extremely high share of borrowed funds is no exception. The relative value of the dollar is already at extremely high levels, and meanwhile the Fed is preparing a new shock.
By changing the key rate, the Fed regulates the cost of borrowing and the speed of currency circulation. As the interest rate increases, loans become more expensive, people spend less, preferring savings and deposits. In the end, this leads to a decrease in inflation, and the side effect is the strengthening of the dollar.
Now the inflation rate in the United States exceeds 9%, this has been observed in the country only 12 times over the past 110 years. Previous rate increases of 0.5% and 0.75% had no effect, so now with a probability of 82%, analysts expect an increase of 1% immediately to a fork of 2.5% – 2.75%.
This is a rare move for the Fed, since in most cases the rate changes by 0.25%.
Such drastic measures can cause a new wave of high-risk asset sales.
Bitcoin is already trading at a 70% discount to the historical maximum, and a number of indicators indicate that the asset is oversold. For example, this is demonstrated by MVRV and Z-an estimate of the deviation of the market value from the realized one.
Now the indicator is at -0.25, the discrepancy is more significant than in 2020, but has not yet reached the lows of 2018 (-0.47) or 2015 (-0.49).
Historical data confirm the possibility of updating local minimums, the probability of which will increase significantly if the regulator increases the key rate by 1% at once. Most analysts expect Bitcoin at around $14,000, as a drawdown of 80% of the record is a historically significant support level.
