U.S. Dollar is Weakening — How Does This Affect BTC?

The United States Dollar (USD) index is declining, indicating that the currency is weakening. While bitcoin (BTC) has been consolidating for some time, the weakening currency may be a good sign for its price.

An analysis by the market analytics firm CryptoQuant has revealed how the shift in the USD index (DXY) could affect not only BTC but also the S&P 500 and gold. This could result in continued range-bound action or a positive trend in prices. 

DXY in Free Fall 

According to CryptoQuant, the DXY’s drop to its lowest level since 2022 is a clear signal that confidence in the dollar is weakening. This reflects a capital rotation out of the dollar into risk assets like BTC and equities.

Niels, co-founder of the Web3 accelerator and incubator Ted Labs, tweeted in late June that the DXY had entered a free-fall mode, falling 11% so far this year. Niels said this was the index’s worst performance in 40 years. He added that the U.S. government is planning to trigger more devaluation by raising the debt limit by $5 trillion.

On the other hand, BTC has been range-bound despite strong inflows into spot exchange-traded funds (ETFs). The asset has been stuck in a 10% range between $98,000 and $111,800, trading roughly 4% below its all-time high (ATH). 

In past cycles, BTC has performed well whenever the dollar has weakened. Last week, Justin Wu, a Web3 community builder, outlined past situations where this trend has played out. The DXY plummeted 15% in 2017, and BTC experienced a massive surge within the following months. When the index followed a similar path in 2021, BTC also experienced a parabolic rise, reaching unprecedented highs later that year.

With DXY tanking this year, BTC is likely to see a significant surge later this year, aligning with the last leg of this bull cycle.

BTC and Gold in Positive Correlation

For the S&P 500 and gold, a weakening dollar could also lead to a surge in prices. The S&P 500 has already reached new highs following a sharp correction driven by macro uncertainty in April. However, gold has been stuck in a range, like BTC, after recording a strong rally earlier this year. Therefore, the chances of the precious metal being affected by the weakening dollar are shaky.

Meanwhile, the correlation between bitcoin and gold has remained positive. Both assets have been trading sideways for the past two months despite broader macro changes.

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