In recent weeks, the negative correlation between Bitcoin (BTC) and the U.S. Dollar Index (DXY), has been broken. The top cryptocurrency is now struggling to gain traction on the upside amid the continued decline in the dollar. One observer believes that the situation may not last for long.

Last week, the dollar index, which measures the exchange rate of greenbacks against major fiat currencies around world, dropped by 2.26%, its worst performance since last November. The index fell below 100.00 and reached its lowest level since April of last year.

bitcoins traded between $30,000 to $32,000. This extended the consolidation of several weeks, even though equities including meme stocks rallied.

Noelle Acheson is the author of Crypto Is Macro Now and former head researcher at CoinDesk & Genesis. She also writes for Crypto is Macro Now.

The dollar is the global reserve currency. It plays an important role for global trade, international borrowing, and nonbank lending. The dollar’s strength can lead to higher debt service costs for those who have borrowed in the currency. They may also reduce their exposure to risky assets. When the dollar weakens, the opposite happens.

The BTC-DXY relation will remain for a long time, however. The U.S. Dollar is not only the denominator of the most quoted pair for the crypto-asset (and when that denominator drops in value, the rate goes up, all other things being equal). It’s also because a weaker U.S. dollars boosts global liquidity, giving U.S. debt holders in various parts of the world more breathing room,” Acheson stated in Monday’s newsletter.

Shares of foreign currency debt (Refinitiv/Federal Reserve)

The chart shows the debt issued by companies in a foreign currency from 2000 to 2022. The U.S. Dollar is the clear choice. Since 2010, the percentage of debt in greenbacks has remained around 70%.

The DXY is too important for crypto market participants to ignore. Bitcoin could also pick up a bid, if the dollar continues to fall.

Dxy sale has legs

Goldman Sachs (GS) believes that the recent dollar decline is not over.

The Dollar fell sharply as a result of lower inflation and the expectation that the Fed would be more patient beyond July. The Goldman Economics Research team wrote to clients that they believe this trend can continue in the short term, as the factors that affected this report are likely to remain softer in the months to come.

Acheson expressed a similar view, stating that fundamentals indicate a continued decline of the dollar.

The USD’s decline is solid. Fundamentals indicate that the USD’s continued decline is inevitable. The U.S. consumer is strong, but inflation is falling fast. The headline inflation rate in the U.S. is now lower on an annual basis than Japan. This is important to remember. Acheson said that although headline inflation is only considered, core inflation is not included.

Fed fund futures indicate that traders expect the Federal Reserve will stop its tightening cycle following the 25 basis point increase in interest rates expected later this month. Since March 20, 2022, rates have been raised by the central bank 500 basis points. The range is now 5%-5.25%. Last year’s crypto-market crash was partially caused by the tightening.

CORRECTION (18 July 2023, 1555 UTC) : Corrects Noelle Acheson’s first name.

Parikshit Miishra is the editor.