Key takeaways:
- The US dollar and the euro are trading at virtually a 1:1 ratio – the last time this happened was 20 years ago
- According to the Dollar Index, USD is in the strongest position since 2002
- The strengthening of the dollar could mean that the value of crypto assets will continue to drop
The last time euro traded this low was in 2002
On Tuesday, the exchange rate for the euro expressed in the US dollar dropped to its 20-year low of roughly $1.001. This marks another in a series of drops that have seen the euro lose nearly 16% in the past 12 months.
Euro is the common currency for more than 340 million people living across 19 member states of the European Union. It is the second most-used currency in the world, trailing only the US dollar.
Euro’s faltering value comes at a time of great economic distress for the Old Continent – the war in Ukraine, energy crisis, rampant inflation, historic drought, and logistics problems have each contributed to the gradual weakening of the euro.
While the EUR/USD parity could be interpreted as the euro losing value, it must be noted that the current exchange rate could predominantly be a consequence of the US dollar reaffirming its position as the world’s most dominant reserve currency.
What does a strong dollar mean for Bitcoin and the crypto sector?
The US dollar has been steadily gaining ground on most major currencies in the past year. Going by data curated by Trading Economics, the US dollar’s value increased by as much as 102% in the past 12 months in comparison to the Turkish Lira. Against other major fiat currencies, such as the Japanese Yen, Indian Rupee, and Chinese Yuan, the US Dollar gained 24.1%, 6.7%, and 4.1%, respectively.
The strengthening of the US dollar over time is neatly encapsulated when looking at the US Dollar Index (DXY), which is a measure of the value of the USD against a basket of currencies. DXY reached its 20-year high this week.
Historically speaking, the price of Bitcoin – and consequently other cryptocurrencies – has been inversely correlated with the value of the dollar.
In addition to the negative correlation with the dollar, Bitcoin has also been hurting in recent months due to the Federal Reserve raising interest rates to their 28-year high to combat inflation. Expansionary assets – such as Bitcoin and tech stock – have been particularly hard hit by the interest rate hikes, due to their inherently riskier investment characteristics.
Investment lead at Kaicho Capital Ajibola Lawal commented on why crypto is seeing a reduction in investments due to the current economic climate when speaking with Nairametrics in June:
“Crypto is still considered further out the risk curve than more traditional asset classes and while the others have suffered drawdowns just as dramatically, Crypto has taken that, and even worse by comparison.”
Lawal added that the downturn will continue until “general investor confidence in taking risk, is restored.”
Bitcoin dropped below $20,000 earlier today on a 4.25% 24-hour price decrease. The world’s largest crypto is predicted to drop even lower according to our algorithmically generated BTC price charts.
