Part 5/9:
The Importance of Debt Dynamics
One key reason the DXY influences global liquidity and crypto prices lies in debt dynamics. Many countries and businesses carry debt denominated in U.S. dollars, while their revenues may not be in the same currency. When the dollar strengthens, these entities owe more in their local currency, prompting them to liquidate assets (including crypto) to meet their obligations. This can trigger a broader sell-off and lead to decreased global liquidity.
On the other hand, when the dollar weakens, demand for liquidity typically increases as debtors are less burdened by their dollar-denominated loans. This rise in liquidity facilitates a reduced risk appetite, prompting investors to allocate more capital toward high-risk assets like crypto.