On Aug 21, Bitcoin (BTC) price declined by more than 3% from around $11,880 to $11,511 on Coinbase. Coincidentally, the U.S. Dollar Index (DXY) started to rebound from its 4-month downturn.
BTC/USD daily chart. Source: TradingView.com
As the dollar increased by 1.3% from $92.28 to $93.20, Bitcoin, major cryptocurrencies, and gold fell in tandem. The seemingly inverse correlation between the dollar and Bitcoin might indicate that the weakening dollar partially catalyzed BTC’s recent rally.
Will a strong dollar rally reverse Bitcoin’s momentum?
Since the major Black Thursday Bitcoin correction, analysts have attributed the current BTC rally to the fading dollar.
Researchers at Kraken exchange, wrote:
“Behind the surge, Bitcoin’s correlation with #gold strengthened to a 1-year high of 0.93. This occurred as markets turned to safe haven assets amid an uptick in COVID cases, increased government spending, mixed corporate earnings, inflation fears and a weakening US dollar.”
Contrarily, when the dollar reverses and begins to rally, the chances of a Bitcoin consolidation phase could rise.
In the last 48 hours, as the US Dollar Index climbed, the price of gold also slumped by more than 3.5%. Gold had been rallying strongly in recent weeks, buoyed by the rising uncertainty around the global economy.
The US Dollar Index shows signs of a recovery. Source: TradingView.com
As such, Scott Melker, a cryptocurrency trader, said that the inverse relationship between Bitcoin and the dollar is more compelling than its recent correlation with the stock market. He noted:
“Bitcoin’s inverse relationship with the dollar is far more compelling than the idea that it is correlated with the stock market.”
The dollar has underperformed against major reserve currencies like the Japanese yen since April and analysts anticipate that if it can sustain its strong momentum gold and the U.S. dollar will be negatively impacted.
The near-term forecast of the dollar
According to Michael Hewson, CMC Markets UK’s chief market analyst, the dollar’s recovery is causing gold’s uptrend to weaken. Hewson said:
“The rebound in the US dollar has also sparked a fresh bout of weakness in gold prices which sold off sharply and are now testing support at $1,920 an ounce, and the renewed uncertainty over the pace of further monetary stimulus from the Federal Reserve.”
Data from Skew also shows that Bitcoin and gold have seen a newfound correlation in recent weeks. If the prices of BTC and the precious metal continue to move in tandem, the likelihood of the strengthening dollar causing a BTC pullback rises.
Karl Schamotta, Cambridge Global Payments’ chief market strategist, said the dollar could be seeing a short squeeze. He explained:
“You’re seeing a bit of an unwind in the short dollar trade that had gained so much momentum in the last couple months.”
The confluence of a dollar short squeeze, the upcoming stimulus deal, and rising economic certainty are contributing to the rebound of the dollar but will this be a short-lived or longer term trend.