Bitcoin (BTC) has regained poise on Wednesday after U.S. Treasury Secretary Janet Yellen toned down comments suggesting interest rate hikes may be needed to stop the economy from overheating.
"It's not something I'm predicting or recommending," Yellen clarified during an online event hosted by The Wall Street Journal late on Tuesday, downplaying remarks made earlier in the day.
"If anyone appreciates the independence of the Federal Reserve, I think that person is me," added the former Fed chief, according to a Bloomberg report Wednesday.
Bitcoin found a floor near $53,000 after Yellen's clarification and was trading back above $55,400 at press time, representing a nearly 4% gain on the day.
Yellen had originally been discussing the scope for rate hikes in the context of U.S. President Joe Biden's plans for $4 trillion of infrastructure and welfare spending over the next decade.
"It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat, even though the additional spending is relatively small relative to the size of the economy," Yellen said at an event organized by The Atlantic magazine.
Catching financial markets off-guard, the remarks intensified fears that an early unwinding of liquidity-boosting stimulus measures might push bitcoin, stocks and other assets lower. The Federal Reserve cut rates to a record low of 0.25% a year ago and has been buying bonds worth $120 billion every month to contain the coronavirus pandemic's impact on markets and the economy.
Bitcoin, often touted as digital gold, has been one of the primary beneficiaries of the Fed's massive inflation-boosting stimulus measures launched in March 2020. The cryptocurrency has charted a six-fold rally over the past 12 months.
While the Fed recently reiterated its commitment to keep the liquidity tap open for a prolonged period, some experts fear the U.S. central bank would ditch its pro-easing bias and turn hawkish later this year.
"We think the market is starting to price a hawkish change in stance into the June and all-important September meeting[s] later," QCP Capital said in a market update on its Telegram channel.
"We expect Fed speakers this week will now set the stage for this shift in domestic stance and outlook, although the worsening [COVID-19] situation will likely buy them some time," the firm added.
The U.S. dollar is starting to show signs of life amid a growing debate over whether Biden's massive spending, coupled with a vaccine-led economic recovery, would force the Fed to scale back stimulus earlier than expected.
The Dollar Index, which tracks the greenback's value against major currencies, rose to a 2.5-week high of 91.44 earlier today, extending its recovery from the two-month low of 90.42 reached on April 29, according to data and chart provider TradingView.
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A continued rally in the U.S. dollar could yield deeper losses for bitcoin. The two assets have moved mainly in the opposite direction since March 2020, courtesy of the Fed's stimulus measures.
"The USD is now a big risk to the crypto market, and the USD is beholden to the Fed," QCP Capital said. "The crypto-sphere is inherently and perpetually massively short USD (against crypto assets), and any spike in USD funding or appreciation in USD value will affect it greatly."
The dollar's recovery rally will likely pick up the pace if the U.S. nonfarm payrolls data, scheduled for release on Friday, blows past expectations, pointing to faster economic recovery.