Author: Omkar Godbole, CoinDesk; Translation: Song Xue, LianGuai
In recent weeks, the negative correlation between Bitcoin (BTC) and the US Dollar Index (DXY) has been broken, and this top cryptocurrency has struggled to gain upward momentum amid continued selling of the US dollar. However, according to one observer, this situation may not last long.
The US Dollar Index, which measures the US dollar’s exchange rate against major global currencies, fell 2.26% last week, marking its worst performance since November of last year. The index dropped below 100.00, reaching a new low since April of last year.
Nevertheless, the trading price of Bitcoin has mainly been between $30,000 and $32,000, continuing weeks of consolidation, despite the rise of tokens including meme coins.
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Noelle Acheson, author of the newsletter “Crypto is Macro Now,” said: “The negative correlation between the US Dollar Index and Bitcoin may reappear because the fluctuations of the US Dollar Index affect the global liquidity situation of assets, thereby affecting the valuation of risk assets including cryptocurrencies.”
The US dollar is a global reserve currency that plays a huge role in global trade, international debt, and non-bank lending. When the US dollar rises, those who have borrowed in dollars face higher debt costs and reduce their exposure to risk assets. A weaker US dollar has the opposite effect.
“However, the relationship between Bitcoin and the US Dollar Index will be difficult to shake in the long term. This is not only because the US dollar is the denominator in the most quoted currency pairs in the crypto asset field (when the value of the denominator decreases, the ratio rises under other equal conditions) – a weaker US dollar also provides more breathing room for global US bond holders and boosts global liquidity of assets,” Acheson said in Monday’s newsletter.
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Note: Foreign currency debt is denominated in the currency of the country where the issuing company is located (rather than the issuing country). Calculated based on current exchange rates. Data is annual data from 2005 to 2022. The legend is displayed in the order of the charts from top to bottom.
Proportion of foreign currency debt issuance (Source: Federal Reserve/Refinitiv)
This chart shows the debt issued by companies in a currency other than their home country from the early 2000s to 2022. The US dollar is clearly the preferred currency, and since 2010, the proportion of debt denominated in dollars has remained stable at around 70%.
Finally, while the impressive bull market of the 2000s is commonly attributed to the launch of exchange-traded funds (ETFs), a positive macro environment, including periods of sustained weakness in the DXY, also played an important role.
Therefore, the trend of the US dollar index is very important, and cryptocurrency market participants cannot ignore it in the long term. If the US dollar continues to weaken, Bitcoin may rise.
The selling momentum of the US dollar index is strong.
Goldman Sachs (GS) stated that the recent downward trend of the US dollar is continuing.
“Due to cooling inflation and market expectations that the Federal Reserve will take a more patient stance after July, the US dollar has been heavily sold off. We believe that this situation may continue in the short term, as the same factors affecting this report may weaken further in the coming months. The policy impact has brought welcome relief to many corners of the market,” Goldman Sachs’ economic research team stated in a report to clients on Friday.
Acheson also expressed a similar view, stating that the fundamentals indicate the US dollar will continue to decline.
“The downward trend of the US dollar feels steady. It’s a long process, and the fundamentals indicate that it will continue to slide. Despite signs that US consumers remain strong, inflation is rapidly declining. Acheson pointed out, “The year-on-year growth rate in the US is now lower than that in Japan. Let’s understand this. Indeed, this only applies to overall inflation, not core inflation, but still.”
Federal funds futures indicate that traders expect the Federal Reserve to end its tightening cycle after raising interest rates by 25 basis points later this month. Since March 2022, the central bank has raised rates by 500 basis points to a range of 5% to 5.25%. Tightening policies were partly to blame for the cryptocurrency market crash last year.
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