Last Updated: 23 August 2022
The value of the euro keeps falling, and it is finally here. According to Google, 1 euro has dropped to a value of $0.99. What does a stronger dollar mean for bitcoin?
Dollar worth more than euro
For years, it was great to be on holiday. A stable euro, which could easily measure up to the dollar, makes travel easy generally. For the first time since 2002, the dollar value of the euro has fallen below USD 1.
At this moment, the euro is worth 0.9945 USD, which makes a holiday in the US a lot more expensive.
Various media conclude that this is due to the fear of a recession in Europe. This is feared because of high inflation and a shortage of gas, among other things. Reference is also made to the high-interest rates in the United States.
Euro stock rises
It would be nice if the ECB’s money printer would get some attention. Let’s face it, because interest rates here are not rising as fast as in the US, but a lot of euros have also been added.
The chart below shows the M1 money supply of the euro. That pink in early 2020 is the start of the corona crisis.
Almost all trading in crypto is done in dollars and not in euros. Therefore, we are not looking at what the euro’s weakness means for bitcoin but rather the impact of the strengthening dollar.
Bitcoin vs Dollar Strength
The chart in green below shows the strength of the dollar, while bitcoin is in orange. By dollar strength (DXY), we mean how much USD is worth against a basket of international currencies, including the euro, the pound, the Canadian dollar, the Swiss franc, and the Swedish krona.
The DXY index rises when the dollar strengthens. So when, for example, the euro falls against the dollar, you get more euros for that one dollar. This indicates that you can buy more with one dollar in Europe.
After being historically incredibly low, the dollar has been recovering since the end of 2021. It is no coincidence that bitcoin reached its all-time high of 69 thousand dollars in November 2021. At the time, bitcoin seemed like the perfect insurance against inflation, but from then on, it went downhill.
Negative correlation bitcoin and dollar
There is an inverse correlation visible between bitcoin and the DXY. In recent years, we have seen very clearly that when the DXY was in a downward movement, the bitcoin price showed an upward movement. And this has also been the case the other way around, as witnessed over the past year.
As the dollar rises, it is more attractive and safer for investors to hold their value in dollars rather than shares, cryptocurrency, and other assets. The only exception is bonds based on the US dollar; investors prefer the safety of a US government bond to more risky investments.
Using the Correlation Coefficient indicator, you can view this negative correlation on Tradingview.
So the dollar and bitcoin prices move in opposite directions. In particular, the weekly correlation coefficient between BTC and USD dropped to 0.87 below zero today.
Bitcoin is in uncharted territory. It has never happened before in bitcoin’s history that the dollar was worth more than the euro.