Bitcoin Bulls Pin Hopes on Weaker Dollar to Extend Rally

Starting from mid-March, bitcoin has primarily been bought and sold between $60,000 and $70,000 according to CoinDesk’s records. The surge in bitcoin, which started in October the previous year, has taken a break. This pause may be attributed to decreasing predictions of Federal Reserve interest rate reductions and a rebound in the dollar index, representing the value of the US dollar against significant fiat currencies.

On March 8, the DXY index received bids at a level of 102.35, leading it to reach a five-month peak of 106.52 during the previous week based on TradingView’s data. It has since retreated slightly to 105.70, offering some optimism for crypto supporters.

According to Mike Alfred, the value investor and founder of Alpine Fox LP, the DXY dollar index reached the anticipated resistance level of 106 and has since begun to reverse. A return to the range of 102-103 could significantly boost this rally. The reasoning behind this is that bitcoin is poised for a short-term surge towards $90,000. Looking further ahead, Alfred predicts that the DXY index will drop to around 92 by late 2025.

In simpler terms, the US dollar holds significant importance in international finance, being used extensively for debt repayment, non-bank loans, and global transactions. When the value of the dollar increases, it makes USD-backed debts more costly, which can discourage investments and risk-taking in financial markets. Conversely, a weaker US dollar has the opposite effect. Historically, the price of bitcoin and other cryptocurrencies, as well as stocks and gold, have often moved in the opposite direction of the US Dollar Index (DXY).

Jan Happel and Yan Allemann, the founders of Glassnode and known as Negentropic on X, expressed their belief that the US dollar may have reached its peak in a “broadening formation” pattern, potentially leading to a decline in the coming weeks, thereby boosting the cryptocurrency market.

An expanding triangle in financial markets is characterized by two trendlines that diverge as the price action forms higher highs and lower lows. The DXY index has recently reversed direction at the resistance level set by the upper trendline, potentially leading to a decrease in value towards the 103 mark within the next month.

Banks bullish on the dollar

Some banks, however, do not foresee immediate dollar weakness.

Based on the analysis of Societe Generale’s Cross Asset Research Team, headed by Kit Juckes, it is now considered uncertain that the Federal Reserve will reduce interest rates prior to the year 2025. This prediction could potentially lead to the DXY index reaching its highest point somewhere between 107 and 110.

If the market adopts our prediction of decreased rates in Q1 2025 without any additional increases, then the highest two-year yield is expected to be approximately 5-5.25%, suggesting only slight growth for the DXY index.

In summary, if the Federal Reserve maintains its current stance for the remainder of this year while other central banks reduce interest rates as predicted, it is likely that the DXY index will reach its highest point between 107 and 110. However, there is a chance that the market may exceed this anticipated upper limit.

In October, when the DXY reached a high of over 107 and bitcoin started to rise, there was widespread belief among markets that the Fed would reduce interest rates by 100 basis points in 2024. However, current market predictions indicate that no more than two rate cuts will occur this year.

In simpler terms, Scotiabank expressed a similar viewpoint to their clients on April 18, stating, “With the Fed keeping interest rates high for an extended period, we can expect the US dollar to remain strong as well.”

U.S. tariffs are dollar bullish

Crypto investors should keep an eye on the developing trade tensions between the United States and China. If these tensions lead to an intensification of the trade war, it may boost the value of the US dollar.

Recently, President Joe Biden of the United States proposed significantly raising the tariff on Chinese steel and aluminum imports from the current 7.5% to 25%. Essentially, a tariff functions as a tax imposed by governments on the total cost of imported goods, which in this case is the price plus shipping and insurance. In essence, it results in an increase in the overall cost of these products and could potentially lead to higher inflation.

Currently, Donald Trump, who previously served as president and is now running for the Republican Party’s presidential nomination, suggests imposing a tariff of 60% or higher on goods imported from China.

According to Barclays, that could push the dollar higher.

According to a recent client note from Barclays’ FX strategy team, U.S. tariffs can boost the value of the dollar through import substitution, but the extent of this effect on currency exchange rates hinges significantly on the specifics.

If Barclays examined the possibility of the U.S. imposing a 60% tariff on all Chinese imports, they forecasted that a Trump win in the upcoming election might lead to a 3% increase in the value of the U.S. dollar (DXY).