Despite the Significant Decline of the U.S. Dollar Index (DXY), Bitcoin Is Not Displaying the Parabolic Growth Usually Associated with This Phenomenon

For several weeks, the U.S. dollar index (DXY) has significantly declined, but contrary to investors' expectations, bitcoin is not displaying the parabolic growth

The U.S. dollar index (DXY) has been on a downward trajectory for several weeks now. However, contrary to investors’ expectations, bitcoin is not displaying the parabolic growth usually associated with this phenomenon. This article delves into the causes of this anomaly and its potential implications.

The historical relationship between Bitcoin and the U.S. dollar in question

On March 7, 2024, the U.S. dollar index fell to 103.60, after reaching 107.6 on February 28, marking a drop of nearly 4% in just a few days. Ideally, this situation should create a favorable environment for bitcoin, which is generally considered a safe haven against the weakening dollar.

Until mid-2024, the inverse correlation between the DXY and bitcoin was almost a certainty for analysts. When the dollar weakened, bitcoin appreciated. This dynamic was explained by the positioning of the queen of crypto as protection against inflation, thanks to its fixed monetary policy and limited supply, similar to digital gold.

However, the past eight months have demonstrated that this relationship is not as simple as it seems. Julien Bittel, head of macroeconomic research at Global Macro Investor, highlights that this type of rapid DXY drop has occurred only three times in the last 12 years, and each time, bitcoin ultimately reacted positively, but with a significant delay.

The multiple factors explaining the current decoupling

Several macroeconomic factors explain bitcoin’s current underperformance despite the weakness of the dollar. Analyst @21_XBT notably identifies “customs tariffs, the DOGE (Department of U.S. Government Efficiency), the yen carry trade, bond yields, and fears of economic growth” as short-term disruptive elements.

The measures taken by the Trump administration, including budget cuts and increased tariffs, created an uncertain economic environment. While these policies may be positive in the medium term by reducing U.S. debt and improving the trade balance, they cause short-term turbulence that affects all risky assets, including bitcoin.

It is worth noting that the positive effects of the dollar’s weakness on bitcoin have historically taken anywhere from six months to several years to materialize. For example, after the significant DXY drop in November 2022, bitcoin did not begin its true ascent until several months later.

The long-term fundamentals of bitcoin remain strong despite this period of temporary decoupling from the DXY. As several analyses indicate, global financial conditions are rapidly easing, which should ultimately benefit assets like bitcoin.

As central banks adopt more expansionary monetary policies to stimulate the economy, current macroeconomic fears will likely fade. This evolution could pave the way for a new historical record. Some analysts even predict that bitcoin could reach 126,000 dollars by June 2025, confirming that the current decoupling from the dollar is only temporary.