Bitcoin and the Dollar: A Seesaw Relationship
Over the last few weeks, Bitcoin's (BTC) inverse correlation with the US Dollar Index (DXY) seems to have faltered, leaving the flagship cryptocurrency struggling to find upward momentum despite the ongoing dollar sell-off. However, this altered relationship might only be temporary, according to one market observer. Amid the greenback's worst weekly performance since November, where it dropped by 2.26%, the Dollar Index fell below the 100.00 mark for the first time since April last year. Even so, Bitcoin's value fluctuated mainly between $30,000 and $32,000, maintaining its multi-week consolidation pattern, irrespective of the rallying equity market, including meme stocks.
Why Dollar Index Fluctuations Matter to Bitcoin
Noelle Acheson, a renowned author of the 'Crypto is Macro Now' newsletter, and former research head at CoinDesk and Genesis, predicts that the inverse relationship between DXY and BTC will likely resurface. She underscores how fluctuations in the Dollar Index can impact global liquidity conditions, thereby affecting risk asset valuations, including cryptocurrencies. As the global reserve currency, the dollar's role in international trade, debt, and non-bank borrowings is profound. A stronger dollar means higher debt servicing costs for dollar borrowers, forcing them to reduce exposure to risky assets, while a weaker dollar has the opposite effect.
Understanding the Ties Between Bitcoin and Dollar Strength
Acheson further explains that the relationship between BTC and DXY is more than just about the US dollar being the denominator in the most quoted pair for the crypto asset. The dynamic of a weaker dollar also promotes global liquidity by providing more financial flexibility to US dollar debt holders worldwide. This insight comes from a review of debt issued by companies in foreign currencies from 2000 to 2022, where the U.S. dollar remained the top choice, accounting for approximately 70% of such debt since 2010.
Gold, Bitcoin, and the Power of a Weakening Dollar
Contrary to popular belief, gold's significant bull run in the 2000s wasn't solely due to the advent of spot-based exchange-traded funds (ETFs). The positive macroeconomic environment, punctuated by periods of DXY weakness, also contributed significantly. Given this historical precedent, crypto market participants cannot afford to overlook DXY trends. If the greenback continues its downward trajectory, Bitcoin could potentially gain substantial traction.
Analysts Confirm: Dollar's Decline is Just Beginning
Goldman Sachs suggests that the recent downtrend in the dollar is far from over. Citing cooler inflation and anticipation of a more patient Federal Reserve stance post-July, Goldman Sachs' Economics Research team believes these factors could continue to weaken the dollar. Acheson shares this sentiment, pointing out that fundamental indicators suggest a continued slide in the dollar, despite indications of a robust US consumer base.
Federal Reserve's Decisions and Their Impact on Bitcoin
Anticipations are rife among traders that the Federal Reserve will cease it's tightening cycle following an expected 25 basis point interest rate hike later this month. Since March 2022, the central bank has boosted rates by 500 basis points, landing them in the 5% to 5.25% range. It's worth noting that this tightening cycle partially triggered the cryptocurrency market crash last year. With these adjustments projected to halt, Bitcoin could see a favorable market shift.