On August 21, the price of Bitcoin (BTC) fell by more than 3% from about $ 11,880 to $ 11,511 on Coinbase. Coincidentally, the US Dollar Index (DXY) started to rebound from its 4-month decline.
BTC / USD daily chart. Source: TradingView.com
When the dollar increased by 1.3% from $ 92.28 to $ 93.20, Bitcoin, major cryptocurrencies, and gold fell in tandem. The apparent inverse correlation between the dollar and Bitcoin could indicate that the weakening dollar partially catalyzed BTC’s recent rally.
Will a strong dollar rally reverse the momentum of Bitcoin?
Since the important Black Thursday Bitcoin correction, analysts have attributed the current BTC rally to the falling dollar.
Researchers at Kraken exchange, wrote:
“Behind the flow, the correlation of Bitcoin with #gold strengthened to a 1-year high of 0.93. This happened when markets turned to safe haven assets amid an uptick in COVID cases, increased government spending, mixed corporate earnings, fears of inflation and a weakening of the US dollar. ”
In contrast, as the dollar reverses and begins to rally, the chances of a Bitcoin consolidation phase could increase.
In the last 48 hours, when the US Dollar Index climbed, the price of gold also fell by more than 3.5%. Gold has been a strong rally in recent weeks, driven by growing uncertainty about the world economy.
The US Dollar Index shows signs of recovery. Source: TradingView.com
As such, Scott Melker, a cryptocurrency trader, sei that the inverse relationship between Bitcoin and the dollar is more compelling than its recent correlation with the stock market. He noted:
“The reverse relationship of Bitcoin with the dollar is much more compelling than the idea that it is correlated with the stock market.”
The dollar has underperformed against major reserve currencies such as the Japanese yen since April and analysts expect that if it can maintain its strong momentum gold and the US dollar will be negatively affected.
The forward term of the dollar
According to Michael Hewson, chief market analyst at CMC Markets UK, the recovery of the dollar is causing the rise of gold to weaken. Hewson said:
“Handball in the U.S. dollar has also sparked a fresh strike of weakness in gold prices that sold sharply and are now testing support at $ 1,920 per hour, and the renewed uncertainty about the pace of further Federal Reserve monetary stimulus . “
Skew data also shows that Bitcoin and gold have seen a new phone correlation in recent weeks. As the prices of BTC and the precious metal continue to rise in tandem, the chances of the strengthening dollar causing a BTC pullback increase.
Karl Schamotta, chief market strategist at Cambridge Global Payments, said the dollar could see a brief squeeze. He explained:
“You see something of a relaxation in the short dollar trade that has gained so much momentum in the last few months.”
The combination of a short squeeze of a dollar, the forthcoming stimulus action, and increasing economic certainty contribute to the handball of the dollar, but this will be a trend of short term rather than longer term.
