Analyst: Bitcoin won't be indifferent to the U.S. dollar index for long

Author: Omkar Godbole, CoinDesk; Compiler: Songxue, Jinse Finance

**Bitcoin (BTC)’s negative correlation with the U.S. dollar index (DXY) has broken down in recent weeks, making it difficult for the top cryptocurrency to gain upward momentum amid the ongoing dollar sell-off. However, according to one observer, this may not last for long. **

The U.S. dollar index , which measures the greenback against major global fiat currencies, fell 2.26% last week, its worst performance since November. The index fell below 100.00, its lowest level since April last year.

Still, bitcoin traded mostly in the $30,000-$32,000 range, extending a multi-week consolidation, even as tokens including the meme coin rallied.

Noelle Acheson, corresponding author of “Crypto is Macro Now”, said:** “The negative correlation between the U.S. dollar index and Bitcoin may reappear, because the fluctuation of the U.S. dollar index will affect the liquidity of global assets, which in turn will affect the value of cryptocurrencies, including cryptocurrencies. Valuations of risky assets within.”**

The dollar is a global reserve currency that plays a huge role in global trade, international debt and non-bank lending. When the greenback rises, those with dollar-based borrowings face higher debt-servicing costs and shrink their exposure to risky assets. A weaker dollar would have the opposite effect.

“However, the relationship between Bitcoin and the U.S. dollar index will be difficult to shake in the long-term. This is not only because the U.S. dollar is the denominator in the most quoted currency pair in the crypto asset space (when the value of the denominator falls, the ratio will rise, in other conditions same scenario) - a weaker dollar also provides more breathing room for holders of U.S. Treasuries around the world, thus boosting global asset liquidity,” Acheson said in a newsletter on Monday.

Share of foreign currency debt issuance (Federal Reserve/Refinitiv):format(jpg)/cloudfront-us-east-1.images.arcpublishing.com/coindesk/HKQV2BY7FFFQJGPHN6BONMUSTQ.png)

Note: Foreign currency debt is denominated in the foreign currency of the country of the issuing company (not the place of issuance). Calculated at current exchange rates. The data are annual data from 2005 to 2022. Legends are displayed in chart order from top to bottom.

Foreign Currency Debt Issuance Ratio (Source: Fed/Refinitiv)

The graph shows corporate debt issued in currencies other than their home country from early 2000 to 2022. The U.S. dollar is the clear first choice, with the share of U.S. dollar-denominated debt holding steady at around 70% since 2010.

Finally, while the impressive bull market of the 2000s is widely attributed to the launch of spot exchange-traded funds (ETFs), a positive macro environment, including periods of persistent DXY weakness, also played a major role.

** Therefore, the trend of the US dollar index is very important and cannot be ignored by cryptocurrency market participants for a long time. If the US dollar continues to fall, Bitcoin may see gains. **

Dollar index sell-off is strong

** Goldman Sachs (GS) said the dollar’s recent downtrend is continuing. **

“The dollar has sold off sharply on cooling inflation and expectations that the Fed will take a more patient stance after July. We think this is likely to continue in the near term as the same factors affecting this report will play out in the coming months More weakness is likely, with policy impacts providing welcome relief to many corners of the market,” Goldman Sachs’ economics research team said in a note to clients on Friday.

Acheson echoed a similar sentiment, saying **fundamentals point to continued dollar declines. **

"The dollar’s decline feels solid. It’s been a long run, and the fundamentals point to it continuing to decline. Inflation is moving down fast, despite signs that the U.S. consumer remains strong. Year-over-year growth in the U.S. Now lower than Japan. Let’s understand this. True, this only applies to headline inflation, not core inflation, but still. "

Fed funds futures showed traders expected the Fed to halt its tightening cycle after raising interest rates by 25 basis points later this month. Since March 2022, the central bank has raised interest rates by 500 basis points to a range of 5% to 5.25%. Austerity policies were partly responsible for the cryptocurrency market crash last year.