In recent weeks, the cryptocurrency market has presented a surprising anomaly – Bitcoin‘s negative correlation with the U.S. dollar index (DXY) has seen a disruption. Despite the greenback’s ongoing devaluation, Bitcoin’s value neither surged nor plummeted severely but instead maintained a stability within the range of $30,000 and $32,000. It persisted in weathering economic fluctuations without escalating into a rally, keeping it locked in an ongoing consolidation phase.
The noted disruption from the usual correlation may not persist for long according to one observer. The dollar index and Bitcoin reportedly show signs of reverting to their inverse relationship due to the dollar index’s major influence on global liquidity conditions. These conditions subsequently touch upon valuations of risk-oriented assets, including cryptocurrencies.
The dollar’s global status enhances its impact on international trade, external debt, and non-banking borrowing. With any surge in the greenback’s value, those indebted in dollar face an upswing in debt servicing costs, pushing them to reduce exposure to risk assets. Consequently, a weak dollar spawns the opposite effects.
While a weak dollar boosts global liquidity, allowing U.S. dollar debt holders to breathe easy, the symbiotic relationship between Bitcoin and DXY would not easily detach. Essentially, a weak dollar could amplify Bitcoin’s chances of attracting more investors if the former continues its descent, despite its current state being attributed to higher inflation and anticipated patient Fed stance.
The chart from the Federal Reserve and Refinitiv highlights a critical point; a large chunk of international debt issued by firms is denominated in U.S. dollars, a preferred choice with a steady 70% hold since 2010.
A weak dollar cannot go unnoticed by crypto market players, drawing parallels with the impressive bull run of gold in the 2000s, attributed greatly to a DXY downturn, besides the launch of the spot-based exchange-traded funds. Hence, Goldman Sachs echoed the sentiment of the dollar’s slide continuing due to solid fundamentals while forecasting more relief in store for several market corners.
In brief, while any expected interest rate hike could dampen the crypto market, traders are, in general, predicting the Federal Reserve to halt its tightening cycle. So, though current conditions present Bitcoin in a seemingly stagnant position, further weakening of the dollar paints a hopeful future for crypto enthusiasts. Nevertheless, markets are unpredictable, and investors should always consider both sides before making decisions.
Source: Coindesk
