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Historically, it can be said that the impact of the dollar index on Bitcoin has a negative correlation. This means that when the dollar is strong, the price of Bitcoin is on the verge of falling, and vice versa, when the dollar is weak, Bitcoin will start an upward trend.
One of the reasons that can be mentioned about the relationship between the dollar and Bitcoin and its negative correlation is the prominent role of Bitcoin as a hedge against inflation.
The dollar index (Dollar Index or USDX) is a measure to measure the value of the US dollar against other currencies. Based on the impact of the dollar index on bitcoin, with the increase of this index, the price of gold and bitcoin will decrease.
Regarding the relationship between the dollar and digital currency and the impact of the dollar index on bitcoin, leading analysts are looking for an answer to the question of whether the strong US dollar can stop the increase in the price of bitcoin or not? In the rest of this article about the relationship between the dollar and bitcoin, I will answer this question and the impact of the dollar index on bitcoin.
Read more: Bitcoin price depends on what factors?!
The performance method of the dollar index and other available currencies
The dollar index is related to six foreign fiat currencies. Due to the difference in the economies of the countries in terms of volume, their impact on the dollar index is also different. These six countries along with the percentage of their impact on the dollar index are as follows:
| ارز | درصد تاثیر بر شاخص دلار |
|---|---|
| euro | 57.6% |
| Yen | 13.6% |
| Canadian Dollar | 9.1% |
| British pound | 11.9% |
| Switzerland Frank | 3.6% |
| Swedish Krona | 4.2% |
The six currencies influencing the dollar index are often introduced as the most influential trading partners of the United States. Of course, it is noteworthy that the dollar index is not always affected by the six countries mentioned above, and in 1999, the euro was able to replace the German mark, the Italian lira, the French franc, the Belgian franc, and the Dutch guilder.
It is worth noting that USDX (Dollar Index) will not indicate the current state of American business. In the coming years, it is possible that the Mexican peso and the Japanese yen will replace the current currencies on the dollar index; Because these countries are more powerful trading partners in America.
What is the Dollar Index (USDX)?
The dollar index with symbols DXY, USDX or DX includes the weighted average of the value of the dollar against a basket of major world currencies. The currencies in this basket are Japanese Yen, Euro, British Pound, Swedish Krona, Canadian Dollar, Swiss Franc. The calculation of USDX is based on the geometric mean of the value of these currencies. As the dollar index increases, the strength of the dollar against the basket also increases and vice versa.
Many factors affect the fluctuation of the dollar index. Monetary policies, the increase and decrease of each of the influential currencies, the rate of export to import and regional conflicts are only some of these factors. The US dollar is actually considered the reserve currency of the world and therefore there is a great demand for it.
Calculate the dollar index
The calculation of the dollar index or DXY is based on the following formula:
USDX = 57.6(EUR/USD) + 13.6(JPY/USD) + 11.9(GBP/USD) + 9.1(CAD/USD) + 4.2(SEK/USD) + 3.6(CHF/USD)
The importance of the dollar index
In expressing the impact of the dollar index on Bitcoin, I must first mention its importance as an important index in the global financial markets. For this purpose, I will discuss its uses in the following:
- Economic Analysis: USDX is used as an indicator of the economic situation of the United States and other countries of the world.
- Foreign currency price forecast: USDX fluctuations affect the price of foreign currencies such as the pound, euro and yen.
- Risk assessment: USDX can be used to measure the risk of investing in foreign currencies.
The relationship between the dollar and digital currency
The relationship between the USDX index and digital currency is quite multifaceted and complex. In addition to the fact that changes in the value of the dollar affect the demand for digital currencies, investors should also consider other factors:
Increase in the dollar index
Usually, an increase in the USDX index leads to a decrease in the demand for digital currencies. The reason for that is that investors will be inclined towards the dollar as a safe haven or safe investment .
Decrease in the dollar index
Basically, the decline of the USDX index will increase the demand for digital currencies. This issue is also due to the fact that in this situation, investors turn to assets with greater risk tolerance, such as digital currencies.
The economic situation
Following the economic recession, there is a decrease in demand for digital currencies. During economic downturns, investors seek assets as stores of value such as gold and dollars. Meanwhile, based on the following article, digital currencies can also be considered as a kind of store of value during economic recession.
Monetary policies
The interest rate increase by the Federal Reserve indirectly affects digital currencies. In fact, an increase in interest rates leads to a decrease in demand for risky assets such as digital currencies.
The impact of the dollar index on Bitcoin
In the following, I am going to explain to you the impact of the dollar index on Bitcoin and the digital currency market. Due to the universality of the dollar and most of the global transactions are carried out by it and its significant reserves in many countries, its changes can create a ripple effect throughout the global economy such as digital currency markets.
With the increase in the strength of the dollar, investors rush to US assets such as stocks and bonds and even the dollar itself. This issue reduces the demand for other alternative assets such as cryptocurrencies. On the other hand, with the weakening of the dollar, investors will be more inclined to alternative assets with higher returns. This trend also leads to an increase in demand for cryptocurrencies.
The chart above shows the relationship between the US stock market and Bitcoin. Correlation between stock market and digital currency means simultaneous price movement. When both prices move in a common direction at the same time, positive correlation of two markets will occur, and with a movement in the opposite direction at the same time, we will see negative correlation.
On August 21, BTC price dropped by more than 3% from the range of $11,880 to $11,511. At the same time, the dollar index began to recover from its 4-month stagnation. A 1.3% increase in the price of the US dollar from $92.28 to $93.20, Bitcoin and gold respectively fell. The reverse relationship between the dollar and bitcoin indicates that the weakness of the US dollar has increased the recent movement of bitcoin.
Dollar and Bitcoin relationship
Since the big Black Thursday price correction, analysts have attributed Bitcoin’s upward movement to a weak dollar. Researchers at the Kraken exchange wrote:
After the wave, the correlation between Bitcoin and gold increased to a one-year high of 0.93. This happened in a situation where the markets turned into safe havens due to the increase in the number of cases of the corona virus, the increase in government spending, the fear of inflation and the weakening of the US dollar.
Conversely, when the dollar reverses and starts to rise, the chance of BTC price stabilization increases. Scott, a cryptocurrency analyst, said that the inverse relationship between Bitcoin and the US dollar is greater than its correlation with the stock market. He noted:
Bitcoin’s inverse relationship with the dollar is much more interesting than the relationship with the stock market.
The reason for the opposite relationship between the dollar and bitcoin
The primary indicators all indicate the inverse relationship between the dollar and bitcoin. This impact of the dollar index on bitcoin is due to mismanagement and environmental monetary policies from the point of view of the famous Winklevoss twins. Also show this inverse relationship.
It’s that digital assets aren’t represented seamlessly in traditional portfolios. It is obvious that the small amounts of 59 billion dollars of cryptocurrency are held by public companies. Below I mention some reasons for the impact of the dollar index on Bitcoin and its negative association:
Possible reasons for negative correlation:
As interest rates are raised by the Federal Reserve, the attractiveness of the dollar as a high-yielding asset will increase. As a result, Bitcoin’s appeal as a non-interest-bearing asset is likely to diminish.
In times of economic instability, investors turn to the dollar as a safe asset. On the other hand, the demand for Bitcoin may decrease due to high volatility and risk-taking. (Of course, according to recent reports, Bitcoin can also be considered as a safe haven.
Some investors use Bitcoin as a tool to diversify their investment portfolio. When the dollar is strong, these people sell bitcoins to balance their portfolios.
The reasons for the absence of absolute correlation
By accepting Bitcoin as a new asset class, this currency can become somewhat independent from the fluctuations of the dollar.
News and events related to bitcoin and dollar also affect their price.
The volatility of Bitcoin can be seen as a result of technical analysis factors such as options contracts and futures.
Attention: Technical analysis without fundamental analysis will be an incomplete analysis. Therefore, it is suggested not to rely on the results of this analysis alone for investment.
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the writer: Thomas Myers
Translation and adaptation: Farhad Moghadam Salimi
The importance of the impact of the dollar index on Bitcoin for traders
The impact of the dollar index on Bitcoin is very important for regular and institutional traders. Paying attention to the correlation between Bitcoin and the dollar index is very important in the current situation because organizations that used to do business with dollars are entering the world of digital currencies more and more. Evaluating the performance of the dollar index plays an important role in trading decisions. Therefore, the long-term review of DXY-BTC and the impact of the dollar index on Bitcoin will be very important to adjust their portfolio.
On the other hand, buying bitcoin when the dollar index falls and vice versa for traders shows another reason for the importance of the impact of the dollar index on bitcoin. These people should note that the correlation between Bitcoin and the dollar index may not continue and is only a logical conclusion.
However, all correlations are the result of price changes and in turn have an impact on the psychological atmosphere of the market. In the field of investing in digital currency, investors can make more informed decisions to achieve their goals by considering the impact of the dollar index on Bitcoin.
The relationship between bitcoin and gold
The dollar has been weaker against major reserve currencies such as the Japanese yen since April 2020, and analysts predict that if it can maintain its strong momentum, gold and the US dollar will be negatively impacted.
According to Michael Huysen, CMC Markets UK’s chief analyst of the UK banking market;
The recovery of the dollar has weakened the value of gold. This jump in the USD has also led to a new round of weakness in the gold price and it is now testing the USD 1.920 support level.
Data from Askew shows that Bitcoin and gold have seen an emerging correlation in recent weeks. If the price of Bitcoin and the precious metal continue to follow each other, the possibility of a rise in the US dollar will be strengthened.
Cambridge Global Payments Senior Strategist Carl Shamutta said;
The US dollar could see a sudden squeeze.
The intersection of the sudden pressure of the US dollar, the upcoming stimulus deal, and the increase in economic certainty will help the US dollar return to strength;
But will this trend be short-term or long-term?!!!
Historically, the relationship between the dollar and Bitcoin has a negative correlation. This means that when the dollar gets stronger, the price of BTC goes down and vice versa.
Bitcoin converges positively with risky currencies and can have an inverse and negative relationship with the US dollar.
Considering that Bitcoin is known as digital gold, it has the weakest correlation with gold.
