The USD index is at multi-year highs as 2025 begins.
In fact – the USD index has not been above 109 since the millennium. The USD rally really started after Trump won the election – but he was vocal about his desire for a weak USD.
Not surprisingly, his policies favor the opposite. Looks like McTrumper is getting one strong USD when he takes office a second time.
For cryptocurrencies – a strong USD can be an issue.
Depending on how you look at the world of risk and transnational capital flows – a strong USD can be a boon for alternative assets, or it could create the mother of all crashes.
No more dollar milkshakes
Those USD index measures the value of the US dollar against other fiat currencies – most commonly the euro.
Back when the USD index was born, Europe was the only other economy in town – and there was more than one European currency (we miss you Deutsche Mark).
Now, with the fact that Asia is probably the most important economic bloc – the USD index seems quite dated. That said – aside from the JPY – most Asian currencies are not reserve or settlement assets.
Strange that…
Regardless – when it comes to investable assets – the big 4 (USD, EUR, GBP, JPY) still reign supreme. With 4 interconnected financial systems that more than 80% of the SWIFT volume – these currencies are important.
Here’s the question – all of these governments have the ability to borrow at levels that limit their ability to EVER pay off the debt. The US federal debt is creeping up to $40 trillion USD – and will continue to pile up as the decade continues.
Inflation is certain in the next 5 years. But counterintuitively – the USD can actually rally against other global currencies. The USD could be on the cusp of its biggest rally ever – when measured by other dying financial systems.
Slurping liquidity
The Dollar Milkshake Theory deserves your attention.
Pioneered by the great brain Brent Johnson – the dollar milkshake theory (DMT from here on out) explains why the biggest debtor in the history of mankind can continue to pump dollars – and the dollar will rise against other currencies.
DMT also suggests (we think – not sure what Brent thinks about cryptos) that Bitcoin could buck the trend – and rise alongside the USD and gold.
The deal breaks down like this – the US may be the biggest debtor in history, but other nations use the currency (USD) for trade and investment. And the debt issue. So unlike the Korean won, the US dollar is needed for interest payments on existing debts in large amounts.
As mentioned – there are trillions of dollars in USD denominated debt out there – all of which creates demand for USDs. But wait – there’s more!
Among the big 4 – USD denominated debt delivers amazing returns.
JPY and EUR debt have much lower yields, and the GBP debt markets cannot provide the liquidity that USD markets can. Money flows to where it is best treated (highest yield) so f$%*ed up it seems, USD debt markets are actually attractive.
Essentially, the sheer amount of USD denominated debt out there creates demand for USDs, even at a time when the US is on a borrowing binge of historic proportions. There is just no other nation on the planet that runs out of debt like the United States…
This seems off
We understand that you may not like the way DMT frames the financial markets. It doesn’t seem fair. As any beggar in Bangladesh will tell you – the world is far from fair!
On the flipside – we all know fiat money is TRASH and the system is falling apart.
A flagging global monetary system could be the reason why the USD, gold and bitcoin are all near all-time highs in early 2025.
There are not many liquid financial assets that allow you to escape the fiat debt trap. Bitcoin and gold are two of the biggest – and both are accepted worldwide.
We think cryptos in general are a great place to be – and it’s much easier to send BNB or XRP across borders compared to a goldbrick. Customs will flag you for sure!
Persistent liquidity crunch risk
One of the problems the DMT suggests could happen is a global liquidity crunch. Check out the article below for a little more background on Bitcoin and global liquidity:
Op-Ed: Crypto’s Crossroads: Market Liquidity, Geopolitics, and the Road to 2025
The Bitcoin pump we mentioned in the article above materialized, but we think it has a lot more to do with the optimism surrounding McTrumper’s crypto policy – and not much to do with the loosening of global liquidity.
We repeat,
“In a market dislocation, crypto prices will be pushed lower. We could look at BTC for support at the $20,000 level if things turn bad. There is no fundamental driver for these price increases – should they occur – they would be driven by panic selling.”
With the FED looking to keep rate cut expectations limited – we are unlikely to see a cheap money party materialize in 2025. A high USD is terrible for global liquidity, meaning BTC prices will come under pressure as the Global markets are digesting tighter monetary conditions.
The Roaring 80s again?
We totally underestimated how much love McTrumper’s election would bring to the crypto sphere!
It was easy to see that Trump was the better of the two candidates for crypto – but his election took BTC to 100k alone. We think the move is overdone, and markets will be waffling for most of 2025.
Unless we get a big shift in central bank policy (free money party a la 2009) and global liquidity. Then all bets are off and BTC goes to 7 figures.
The article above breaks down what the Plaza Accord was, and why we may see similar political action in the medium term. The USD is painfully high – and the US war machine is in full gear. Dislocation risks exist.
If and when there is a coordinated effort to beat the exchange value of the USD, we will see the biggest crypto rally in the post-crypto ETF world. Until then we would prepare for rough water.
BTC is going much, much higher!
With growing debt issuance from the big 4, and many other major nations (look your way China) alternative assets will increase significantly for the rest of the decade.
The question now is – how much volatility will crypto investors have to endure before we see BTC at $1 million USD?
Due to the hawkish attitude of the FED – we think that some churn will come to the crypto markets in 2025. If we see a major development in the Middle East – for example – a major attack on Iran – the markets can fall apart in a matter of days.
It’s all on the table as we enter 2025.
We love milkshakes BTW. Wouldn’t it be nice if they still cost a dollar…
