Both the Czech koruna and bitcoin are rising to highs against the dollar. Because of yesterday’s cardinal mistake of the head of the American central bank.
During trading yesterday evening CET, the Czech koruna strengthened against the dollar to the level it last reached before Russia’s invasion of Ukraine last February. It strengthened up to 21.62 crowns per dollar. This morning, the exchange rate against the dollar improved even more, to 21.56. The last time it was at stronger levels than these two was on February 23 last year, the eve of the invasion.
At the same time this morning, Bitcoin, the world’s oldest and most widely used cryptocurrency, broke the psychological threshold of $24,000 apiece. It was sold for up to $24,252, according to Bloomberg data. The last time it was more expensive was last year on August 17.
Powell’s blinders
Both the koruna and bitcoin are strengthening immediately against the dollar due to the mistake made by the head of the US central bank, Jerome Powell. The US Federal Reserve raised its key interest rate by 0.25 percentage points yesterday, in line with expectations. However, in an accompanying speech, Powell answered, on the contrary, that they are tightening when asked whether financial conditions in the US are not loosening too much. However, that is not true. According to indicators compiled by Bloomberg and Goldman Sachs, financial conditions have visibly eased since the last meeting of the US central bank in December.
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Powell’s mistake – possibly intentional – was interpreted by the markets as a fundamental relaxation of the US central bank’s determination or vigilance in the fight against inflation. According to their prevailing interpretation, the latter is now more willing to tolerate looser monetary conditions, because even though they are actually loosening, it still believes that they are tightening. In other words, it does not have a problem with the simultaneous release of conditions, in fact it does not even register it. Or at least they try to give the impression that they don’t register it.
However, this means just certain things “turning a blind eye” to current inflation. Such “turning a blind eye” fills investors with optimism, because – if it continues – it will translate favorably into the development of share prices. If monetary conditions tighten less vigorously, or even loosen, this means an improvement in the conditions for financing investments or stock purchases, both of which have a positive effect on stock prices. Therefore, in response to Powell’s words, the stock markets in the US headed up noticeably.
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Attractive risk
Simultaneously with the improvement of financing conditions the willingness of investors around the world to invest in riskier assets or currencies, which include the crown or bitcoin, is increasing. Bitcoin is even a fully speculative asset. If investment financing is more available, the potential loss resulting from the materialization of risk is not as painful as with more expensive, less available financing. That is why today both the koruna and bitcoin are consolidating to multi-month highs.
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