August 21st The price of Bitcoin (BTC) on Coinbase dropped more than 3% from around $ 11,880 to $ 11,511. Coincidentally, the US Dollar Index (DXY) began to rebound from its 4 month decline.
Daily chart of the BTC / USD pair. Source: TradingView.com
When the dollar rose 1.3% from $ 92.28 to $ 93.20, Bitcoin, major cryptocurrencies, and gold collapsed. The seemingly inverse correlation between the dollar and Bitcoin could suggest that the weakening of the dollar partially catalyzed BTC’s recent rally.
Will a strong rally in the dollar reverse Bitcoin’s momentum?
Since the big Bitcoin correction on Black Thursday Analysts have attributed the current rally in BTC to the falling dollar.
The Kraken Exchange researchers, they write::
Behind the surge, Bitcoin’s correlation with #gold strengthened to a 1-year high of 0.93. It did so as markets turned to safe havens amid a surge in COVID cases, increased public spending, mixed corporate earnings, inflation fears, and a weaker US dollar. “
Vice versa, If the dollar reverses and begins to recover, the chances of a period of consolidation for Bitcoin could increase.
In the last 48 hours With the rise in the US dollar index, the price of gold also fell by more than 3.5%. Gold had rallied sharply in the past few weeks, reflecting growing uncertainty about the global economy.
The US dollar index is showing signs of recovery. Source: TradingView.com
As such Scott Melker, a cryptocurrency trader, said that the inverse relationship between Bitcoin and the dollar is more convincing than the recent correlation with the stock market. He highlighted:
“Bitcoin’s inverse relationship to the dollar is far more compelling than the idea that it correlates with the stock market.”
The dollar has underperformed against major reserve currencies such as the Japanese yen since April and April Analysts believe that gold and the US dollar will be adversely affected if they can maintain their strong momentum.
The dollar’s short-term forecast
According to Michael Hewson, Chief Market Analyst at CMC Markets UK, The recovery of the dollar is causing the gold uptrend to weaken. Hewson said:
“The US dollar rally has also sparked a fresh burst of weakness in gold prices, which sold heavily and is now testing support at $ 1,920 an ounce, and renewed uncertainty about the pace of further monetary stimulus from the Federal Reserve.”
Skew data also shows that Bitcoin and gold have seen a new correlation in the past few weeks. If BTC and precious metal prices continue to move simultaneously, the likelihood that the strengthened dollar will cause a BTC retreat increases.
Karl Schamotta, Chief Market Strategist at Cambridge Global Payments, said so The dollar could see a small decline. He explained:
“You are seeing some relaxation on dollar shorting, which has picked up so much in the last few months.”
The confluence of a bearish contraction of the dollar The impending economic agreement and growing economic security are contributing to the dollar rally, but it will be a short or long term trend.