Central
bankers have simultaneously started their monetary tightening and are expected
to continue at a synchronized pace throughout the summer, not counting the
interest rate hiking cycle break taken by the Federal Reserve (Fed). Some
central banks, like the European Central Bank (ECB), continued to raise rates
according to the expected schedule, while others like the Bank of England (BoE),
accelerated their hiking pace.
Central
bankers have to act almost in the same rhythm considering the nature of
economic processes that are being observed on a global scale and considering the
nature of the U.S. Dollar-centered global financial system. However, central
banks have different room for tightening actions. The strong American economy
provides more room for the Fed to counter inflation, while in the Old World a weaker
economy limits such actions.
Thus, we
may see the U.S. Dollar declining against other currencies, and the stock
market rising. An understanding of economic developments could provide an
answer to how long this situation will last. The U.S. Dollar is the guiding
star for the movements of other assets, as the Dollar-denominated debt is
considered the safest. The increase of the U.S. debt yields significantly
limits reasons to buy other assets. In this situation stocks and cryptos
suffer.
On the other
hand, when the Greenback is weakens other assets may rally. This is exactly
what is going on now after the Fed took a pause in its interest rate increase
process. Still, U.S. central bankers have explicitly tuned their rhetoric into
a hawkish one promising to resume interest rate hikes by the end of the summer
or at the beginning of this autumn.
The weak
point in the fight with inflation is the helicopter money that was poured into the
economy during the pandemic. Americans used close-to-zero borrowing rates to
accumulate substantial amounts of cheap loans, while market turbulence led to
elevated rises of wages, mitigating the effect of inflation. Thus, high
consumer activity is intact and recession risks are rather low. Such dispositions
leave the Fed without any incentives to lower its rates, while taming inflation
to reach its target is on the table. Considering this logic, higher-for longer
interest rates and contracting liquidity for risky assets is the most realistic
scenario. Global economic issues are here to make the Dollar the most wanted
safe haven direction for investors.
Undoubtfully,
as digital assets are the riskiest ones, they will experience this pressure and
will hardly be able to resist it. Crypto prices may move long distances both up
and down within the short term without a clear understanding of a specific
direction in the long term. Thus, it is rather likely that we may see Bitcoin
at $22,000 per coin and it may rather head lower than go up.