The dollar index’s rise to 106.12, marking its highest level since June, signals a potential shift in the crypto market’s momentum that has defined much of 2024’s trading.

The strengthening dollar, buoyed by expectations of inflationary import tariffs under President-elect Donald Trump’s incoming administration, has already begun to impact cryptocurrency valuations. Bitcoin pulled back 1.2% to $86,945 after reaching its new all-time high, demonstrating the immediate effect of dollar strength on digital assets. It then moved on to $93,000 showing that the dip, was short-lived and heavily bought.

Source: BNC Bitcoin Liquid Index

Market analysts point to a direct correlation between Trump’s proposed economic policies and current market movements. “It’s still an extension of the post-election moves,” explains Vassili Serebriakov, FX strategist at UBS in New York. “The market is focusing on the implications of a second Trump term, particularly policies that would be positive for the dollar such as potential higher tariffs.”

The interconnection between traditional and crypto markets becomes clearer when examining the broader economic context. The U.S. 10-year Treasury yield has jumped 13.1 basis points to 4.439%, reflecting growing expectations of sustained higher interest rates. This environment typically creates challenging conditions for risk assets, including cryptocurrencies.

The market impact extends beyond Bitcoin to other cryptocurrencies. Notably, Dogecoin’s price action has been influenced by Trump’s announcement of Elon Musk’s potential role in the Department of Government Efficiency (DOGE), highlighting how political decisions continue to sway crypto market sentiment.

“There’s definitely a herd mentality building up here,” warns Amarjit Sahota, executive director at Klarity FX in San Francisco. The observation suggests that current market movements might be driven more by speculative trading than fundamental value, raising questions about the sustainability of crypto valuations in a strong-dollar environment.

The dollar’s strength is particularly evident against major currencies, with the euro falling to $1.0596, its lowest since November 2023, and the yuan weakening to 7.2378, its lowest close since August 1. This broad-based dollar rally could pressure cryptocurrency valuations as international investors find their purchasing power diminished.

Also, while Bitcoin has shown resilience by maintaining levels above $86,000, the strengthening dollar and potential for higher interest rates – driven by Trump’s proposed tariffs and their inflationary impact – could challenge crypto’s upward trajectory. This situation is further complicated by the Federal Reserve having less scope to cut interest rates, a factor that historically has supported cryptocurrency valuations.