By Chris Hollingworth 
Bitcoin (BTC) has experienced a 12% decline since March 2, almost reaching $94,000. Interestingly, during this same period, the US dollar has weakened against a basket of foreign currencies. This weakening of the dollar is typically viewed as a positive signal for scarce assets like Bitcoin. Investors are currently pondering why Bitcoin has not responded positively to the declining US Dollar Index (DXY) and what might be the next catalyst to prompt a decoupling from this trend.
Historically, up until mid-2024, the US Dollar Index (DXY) maintained an inverse relationship with Bitcoin’s price, meaning that Bitcoin often saw gains when the dollar weakened. During this time, Bitcoin was widely regarded as a hedge against inflation due to its lack of correlation with the stock market and its fixed monetary policy, akin to digital gold.
However, it is crucial to note that correlation does not necessarily imply causation, and the reasoning behind investing in Bitcoin has evolved over time. Some analysts now suggest that Bitcoin’s price aligns with the global monetary supply as central banks adjust their economic policies. Others highlight Bitcoin’s role as uncensorable money, facilitating free transactions for both governments and individuals.
Julien Bittel, the head of macro research at Global Macro Investor, recently pointed out that the recent decline in the US Dollar Index from 107.6 on Feb. 28 to 103.60 on March 7 has only occurred three times in the past twelve years. Bittel’s analysis underlines that Bitcoin’s price surged following the previous significant drops in the DXY Index in November 2022 and during the early stages of the COVID-19 crisis in March 2020. He emphasizes that “financial conditions lead risk assets by a couple of months,” indicating that current easing financial conditions could be beneficial for Bitcoin in the future.
While Bittel’s outlook is optimistic for Bitcoin’s price, it is important to acknowledge that the positive effects of past US dollar weakness have taken several months and sometimes even years to materialize. The current underperformance of Bitcoin might be attributed to “short-term macro fears,” as highlighted by user @21_XBT, who points to various factors including tariffs, Doge, Yen carry trade, yields, and DXY affecting Bitcoin’s recent price weakness.
As macroeconomic fears gradually dissipate and central banks implement more expansionary monetary policies to stimulate economies, Bitcoin is likely to decouple from the DXY Index, potentially setting the stage for a new all-time high in 2025.
Overall, it is essential for investors to closely monitor the evolving dynamics between Bitcoin and the US dollar, as well as broader macroeconomic trends, to make informed decisions in the ever-changing financial landscape.
