The relationship between the strength of the US Dollar Index DXY and the Federal Reserve's decisions regarding interest rates remains the dominant factor in determining global risk appetite and, consequently, the movements in the cryptocurrency market. A strong dollar means that cryptocurrencies become more expensive for international investors, reducing their attractiveness as a hedge against inflation or the depreciation of other fiat currencies. As the DXY index rises, selling pressures on Bitcoin increase, and vice versa. This correlation has become nearly constant in the economic analyses of the crypto market. The Fed's decisions are the main driver of the dollar's strength; when the Fed raises interest rates or keeps them high for longer periods, it increases borrowing costs and makes holding non-yielding assets like cryptocurrencies less attractive compared to government bonds or high-yield deposits. This is known as the "yield attractiveness effect." Analysts at Foresight and SoSoValue focus on the expectations of upcoming US inflation data and the Fed's periodic meetings, which guide the strategies of large traders who monitor CoinGlass and TradingView data. If expectations indicate continued monetary tightening, liquidity tends to flow out of high-risk assets towards the dollar and traditional safe assets. This explains the volatility we witness before and during the release of significant economic data. Large traders use the strength of the dollar as an indicator of global liquidity levels. The more liquidity is withdrawn by the Fed to combat inflation, the weaker the upward momentum in Bitcoin and Ethereum becomes. However, if signals begin to point towards monetary easing or interest rate cuts, this leads to a weaker dollar and a return of liquidity to support the rise of cryptocurrencies as a hedge against inflation. The relationship between them is a traditional inverse relationship most of the time, as the cryptocurrency market is significantly affected by US monetary policy decisions that determine the global cost of money. Therefore, any deep analytical article should start with an analysis of the dollar index and Fed expectations before diving into the technical analysis of the digital market. This confirms that Bitcoin is no longer just a technological asset but also a financial asset that interacts strongly with the decisions of major central banks.
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