Understanding Bitcoin’s Response to the US Dollar Index: An In-Depth Analysis

Bitcoin (BTC) has experienced a notable decline of 12% since March 2, when its price approached $94,000. Interestingly, during this same period, the US dollar has depreciated against a range of foreign currencies, typically a positive indicator for scarce assets like Bitcoin. As a result, investors are left questioning why Bitcoin has not reacted positively to the declining US Dollar Index (DXY) and what upcoming factors might trigger a decoupling from this unexpected trend.

Historically, up to mid-2024, there existed an inverse relationship between the US Dollar Index (DXY) and Bitcoin’s price. Bitcoin was often perceived as a hedge against inflation due to its lack of correlation with the stock market and a fixed monetary policy reminiscent of digital gold.

However, correlation does not imply causation, and the motivations behind Bitcoin investment have evolved over time. Analysts have pointed out different factors influencing Bitcoin’s price movements, including the global monetary supply adjustments by central banks and its role as uncensorable money that facilitates free transactions for both governments and individuals.

Delayed Bitcoin Gains from DXY Weakness

Julien Bittel, head of macro research at Global Macro Investor, highlighted that the recent decline in the DXY—from 107.6 on February 28 to 103.60 on March 7—has only occurred three times in the previous twelve years. Bittel’s analysis suggests that while Bitcoin’s price surged after the last significant DXY drop in November 2022, and even during the onset of the COVID-19 crisis in March 2020, financial market conditions usually precede risk asset movements by months.

Bittel’s observations indicate that the relaxation of financial conditions can have a multifaceted impact on Bitcoin’s price, although the benefits of past US dollar weaknesses have typically taken over six months—or even years—to manifest. Current underperformance could, therefore, be attributed to short-term macroeconomic concerns.

The prevailing analysis suggests factors such as tariffs and broader economic policies contribute to Bitcoin’s recent volatility. However, these aspects do not undermine its long-term fundamentals, indicating a future recovery is likely.

In time, macroeconomic anxieties are expected to dissipate as central banks implement more expansive monetary policies aimed at revitalizing economies. This leads to the projection that Bitcoin will ultimately decouple from the DXY Index, potentially paving the way for reaching a new all-time high by 2025.

This article serves informational purposes only and is not intended as legal or investment advice. The perspectives herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.