In recent weeks, the negative correlation between Bitcoin (BTC) and the U.S. dollar index (DXY) has broken, making it difficult for the leading cryptocurrency to gain upward momentum in the face of the ongoing decline in the value of the dollar. However, according to one observer, the situation might not last long.
The dollar index, which measures the value of the dollar relative to the most important global fiat currencies, saw its lowest week since November last week, falling 2.26%. The index fell below a hundred, reaching its lowest level since April of last year.
Even when equities, particularly joke stocks, surged, bitcoin continued to trade mostly between $30,000 and $32,000, prolonging the multi-week consolidation.
The dollar is a major player in international trade, debt, and non-bank borrowing, making it a major reserve currency. When the dollar strengthens, those who borrow money incur greater debt servicing expenses and reduce their exposure to risky investments. The opposite is true as the dollar declines.
“However, the BTC-DXY link won’t be easy to break for long. The U.S. dollar is not only the denominator in the most-quoted pair for the cryptocurrency asset (and when the denominator decreases in value, the ratio increases otherwise), but a weaker dollar also increases global liquidity by giving U.S. dollar debt holders around the world more breathing room, according to Acheson.
The majority of debt is denominated in U.S. dollars, with that percentage remaining constant at roughly 70% since 2010.
Lastly, while the introduction of spot-based exchange-traded funds (ETF) is often credited with starting gold’s remarkable bull run in the 2000s, the favourable macroeconomic backdrop, particularly extended periods of DXY weakness, also had a significant influence.
Therefore, developments in the DXY are too significant for players in the cryptocurrency market to ignore for very long, and bitcoin could pick up a bid if the dollar continues to depreciate.
DXY’s sell-off is continuing.
Goldman Sachs (GS) believes the recent decrease in the value of the dollar is sustained.
In response to lower inflation and the expectation of a more patient Fed approach after July, the dollar fell substantially. The same factors that weighed on this report look likely to be even softer in the upcoming months, and the policy implications bring welcome relief to a number of corners of the market, so we think this can extend in the near term,” Goldman’s Economics Research team wrote in a note to clients on Friday.
Acheson expressed a similar viewpoint, stating that the fundamentals indicate that the dollar will continue to fall.
“The USD slide feels substantial. It took a while, and the fundamentals indicate that it will continue to decline. Although there are indications that American consumers are still robust (more on this below), inflation is falling quickly. Now, the United States has lower annual headline inflation than Japan. Think about that. However, Acheson pointed out that this only relates to headline inflation and not to core inflation.