Bad omen? US dollar and Bitcoin are both slumping in a rare trend
Bitcoin struggles to regain momentum despite the dollar falling to a seven-week low.
Yet, the U.S. dollar index (DXY) has continued to fall in recent weeks, dropping to its lowest point in seven weeks to 90.85.
Why is this a concerning trend?
Alternative stores of value in the likes of Bitcoin and gold are priced against the U.S. dollar. Hence, when the dollar drops, the value of Bitcoin should theoretically increase, as BTC trades against the dollar.
In recent days, however, Bitcoin has performed poorly following the highly anticipated public listing of Coinbase.
The trend is concerning because the probability is higher for Bitcoin to see an uptrend when the dollar is declining, as shown by the inverse relationship in the chart above.
But in recent days, Bitcoin has been having a hard time remaining above a key whale cluster level at $56,000, which indicates that there is heavy selling pressure on BTC, particularly as the price is struggling to rebound above the 50-day moving average (the green line in the chart below).
Moreover, some analysts say the dollar may see a relief rally. If this occurs, it should create a less favorable environment for Bitcoin to regain its momentum.
In a note to clients obtained by CNBC, Commerzbank strategist You-Na Park-Heger said that the eurozone’s vaccine optimism and the Federal Reserve’s firm stance on inflation likely drove the dollar’s decline.
While this put an immense amount of pressure on the dollar in the short term, Park-Heger said that the trend could possibly change in the weeks to come.
“The economic recovery in the U.S. might drive up inflation expectations further, fuelling rate hike speculation. The news situation in the euro zone in connection with corona might change again as uncertainty remains high.”
But not everyone agrees that the dollar will resume its uptrend. Credit Agricole researcher Valentin Marinov, for example, said that the attractive yields in alternative markets are putting pressure on the dollar.
“Indeed, the USD rally is all but distant memory by now and the currency’s underperformance seems to reflect the apparent divergence in the outlook between the slumping UST yields and the rather perky bond yields elsewhere. This is almost the exact opposite of the moves we saw in March.”
10T Holdings co-founder Dan Tapiero also expects more downside for the dollar, stating that its bear market hasn’t even started.
How early is it still for #Bitcoin?
The US dollar bear market hasn’t even begun yet.
— Dan Tapiero (@DTAPCAP) April 19, 2021
In any case, the futures market and high leverage appear to have a more immediate impact on Bitcoin’s price, while a weakening dollar should continue to be a bullish factor for BTC in the medium to long term.
Things might change for Bitcoin in the near term
Starting April 20, over 70 million customers will be able to buy, hold and sell crypto directly within the Venmo app as the feature gets rolled out over the next three weeks.
Additionally, WeWork announced it will be accepting cryptocurrency payments and holding them on its balance sheet.
In the foreseeable future, this renewed momentum could allow Bitcoin to regain its footing after a week of rare underperformance in tandem with the dollar.
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Author: Joseph Young