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,…