1. Overview: Bitcoin’s Price and the U.S. Dollar Index

At the beginning of July, the Bitcoin market showed a notable lack of volatility. This was in contrast to the expectations of many market participants, who anticipated a significant increase in the price of Bitcoin following the fourth halving. As of July 10th, the price of Bitcoin had declined to $58,033.88, representing an approximate 8.62% decrease from its price immediately following the fourth halving. Our findings indicate that the US Dollar Index(DXY) and Bitcoin have exhibited opposing trends, with fluctuations occurring in opposite directions. To thoroughly examine this relationship, we have analyzed the correlation between Bitcoin and the U.S. Dollar Index since 2012. Furthermore, the underlying factors contributing to this inverse correlation offer insights into potential future developments.

 

Figure 1: The BTC and the U.S. Dollar Index

Data source: Yahoo Finance

 

2. Relationship: An Inverse Dance of Bitcoin and the U.S. Dollar Index

Historical analysis reveals an inverse correlation between Bitcoin's price and the US Dollar Index (DXY). A growing correlation between BTC and DXY was observed since late 2012. This marked the first significant interaction between these two previously unrelated economic indicators. Figure 2 provides a detailed illustration of the trends in BTC and DXY during 2012 and 2014. This figure offers the first substantial evidence of the inverse relationship between Bitcoin and the US Dollar Index. In the years that followed, the relationship between Bitcoin and the US Dollar Index exhibited a pattern of fluctuating values. While Bitcoin's rise over the past few years is noteworthy, the volatility caused by the US Dollar Index has had a significant impact on Bitcoin's performance.

 

In this section, we introduced the Pearson correlation coefficient to quantify the relationship between these variables. To avoid potential impacts from the extensive period on the data, we employed a methodology where the correlation coefficients were calculated based on data for each natural year. Both the US Dollar Index and the price of Bitcoin are subject to market fluctuations, changes in monetary policy, and other influencing factors. Aggregating data from all-natural years could result in a disproportionate impact of any single data fluctuation on the overall correlation coefficient. By analyzing data annually, we aim to capture a more accurate and nuanced understanding of the correlation between BTC and DXY, accounting for temporal variations and mitigating the impact of abnormal data points.

 

Figure 2: BTC and DXY from 2012 to 2014

Data source: Yahoo Finance

 

The correlation coefficients for each year are illustrated in Figure 3. The correlation coefficients between BTC and DXY exhibited a predominantly negative trend, although there were also some years in which a positive correlation was observed. Consequently, the data has been divided into three categories: the first encompasses the period between 2012 and 2014, the second encompasses the period between 2015 and 2016, and the third encompasses the period beginning in 2017. Furthermore, we calculated the correlation coefficients for 30, 60, and 90 days before the present time point for comparative analysis, the correlation coefficients are -0.1563, 0.4312, and -0.4116, respectively. As previously stated, an extended period for the data can introduce considerable noise, which can affect the correlation coefficients. The negative correlation between Bitcoin and the U.S. dollar persists despite recent fluctuations, though it has weakened somewhat compared to 90 days ago (-0.4116).  

 

Figure 3: Correlation Coefficient Between BTC and DXY

Data source: Yahoo Finance

 

In its latest statement, the Federal Reserve indicated a high probability of a rate cut in September of this year, while the current rate has stabilized at 5.33%, remaining within the Fed's 5.25% to 5.5% range. The following sections present an analysis of the fundamental reasons for the alteration in the correlation coefficients across the three stages, as well as an examination of the factors that contribute to this change. We will discuss in more detail the reasons that cause the fluctuation of BTC and DXY, and their change of correlation coefficient in the following section.

3. Behind the Market: A Comprehensive Analysis

In this section, we will undertake a detailed examination of the parsing of the three stages mentioned in the preceding. The primary factors influencing the correlation coefficients include but are not limited to, Federal Reserve policy, U.S. presidential elections, international political movements, and market sentiment.

 

3.1 Early Stage (2012-2014):

In 2012, Bitcoin completed its first halving, and its overall trend rose above $10. However, the correlation between Bitcoin and the US Dollar Index was not particularly strong, with an overall correlation coefficient of 0.0536 in that same year. In 2013, the suggestion by former Federal Reserve (Fed) Chairman Ben Bernanke to reduce bond purchases led to the “taper tantrum”, causing market volatility and a surge in the dollar as investors anticipated tighter monetary policy. This was confirmed in December when the Federal Reserve announced the start of tapering in January 2014, thereby reinforcing the move toward monetary normalization and strengthening the dollar. Meanwhile, the U.S. economy showed signs of recovery with stronger GDP growth, and improved employment reports (Sullivan, 2014), and advancements in the housing market. These developments rendered the dollar a more alluring investment vehicle for investors. In contrast, the Eurozone and Japan experienced economic stagnation, which, in conjunction with shifts in market sentiment, contributed to DXY volatility.

In 2014, the Fed continued tapering quantitative easing (QE), concluding the program in October, which further bolstered the dollar amid speculation about future interest rate hikes. In response to divergent monetary policies, the European Central Bank introduced negative interest rates and initiated an asset purchase program. Concurrently, the Bank of Japan augmented its quantitative easing (QE) initiatives, thereby diminishing the value of its currencies relative to the US dollar. The robust performance of the US economy, characterized by robust job growth and consumer spending, contrasted with the relatively sluggish growth observed in Europe and Japan, thereby reinforcing the dollar's appeal. Furthermore, geopolitical events, including the Russia-Ukraine conflict and instability in the Middle East, led to an increased demand for the US dollar as a Safe-Haven. These combined factors—monetary policy shifts, economic performance disparities, and geopolitical uncertainties—influenced the DXY's trajectory throughout 2013 and 2014, contributing to its ongoing volatility and strength.

 

3.2 Middle Development (2015-2016)

During the middle development, Bitcoin and the US dollar index have opposed trends. As Figure 3 illustrates, the correlation coefficient had a positive return in 2015 and 2016. Bitcoin demonstrated a strong upward period. Between 2015 and 2017, Bitcoin soared from $314.08 to $12,897.07, a gain of more than 97.56%. The US Dollar Index, on the contrary, was very volatile during these three years, especially until September 2016. The US Dollar Index fell sharply in the first and second quarters of 2017, despite a three-month gain before that.

 

We believe one of the reasons for a positive coefficient is market sentiment. The prevailing sentiment in the market exerts a considerable influence on the Bitcoin ecosystem. Positive market sentiment is often accompanied by notable shifts in the price of Bitcoin, whether it experiences an increase or a decline. Many investors attempt to generate profits through speculation rather than rigorous analysis. As Bitcoin's value increases, more individuals are likely to follow the trend of investing in Bitcoin and continue to speculate on its price. The rapid growth of Bitcoin in its current development phase has prompted many investors to take an interest, maintaining a positive market sentiment.

 

In late 2016, the US economy demonstrated robust performance across key indicators. Job growth remained strong throughout the year, with consistent additions to the workforce and an unemployment rate holding steady between 4.9% and 5%. This stability signaled a healthy labor market environment, bolstering overall economic confidence. GDP growth showed resilience, with a significant uptick in the third quarter reaching a revised growth rate of 3.5%, reflecting underlying economic strength and momentum (Vernon Brundage Jr., Evan Cunningham, 2017). Consumer confidence was high, as evidenced by the University of Michigan's Consumer Sentiment Index, Figure 5, which indicated increased optimism among consumers. This positive sentiment translated into heightened consumer spending, particularly during the holiday season, contributing to economic expansion. Moreover, industrial production saw improvements, with growth in manufacturing and mining sectors adding to the broader economic growth story.

 

Figure 4: BTC and DXY Between 2015 and 2016

Data source: Yahoo Finance

 

The 2016 U.S. presidential election significantly impacted financial markets. Donald Trump's victory in November sparked optimism due to his promises of substantial infrastructure investments, tax cuts, and deregulation. These policy announcements led to market rallies, with the S&P 500 and Dow Jones Industrial Average reaching record highs. The anticipated tax reforms and infrastructure spending fueled investor optimism, expected to spur business investments and consumer spending. Additionally, pledges to reduce regulatory burdens, particularly in financial services and energy sectors, were seen as catalysts for increased corporate profitability. This favorable regulatory outlook bolstered investor confidence and contributed to the appreciation of the DXY following the election.

 

Figure 5: 2015-2016 Consumer Sentiment Index

Data source: University of Michigan

 

3.3 Later Period (2017-2024)

Following 2017, Bitcoin entered a period of exponential growth, with the price exceeding previous record highs regularly. This was an outcome that had not been anticipated before 2017. Following the third phase, the relationship between BTC and DXY became increasingly correlated, with the correlation coefficient remaining below -0.5 except for 2019 and 2021. In 2022, the correlation coefficient reached an all-time low of -0.8506.

In 2018, DXY increased due to several factors. The Federal Reserve raised interest rates four times, bringing the federal funds rate to between 2.25% and 2.50%. These hikes were intended to prevent the economy from overheating and to control inflation, attracting foreign investment and boosting demand for the dollar. The US economy showed robust performance, with GDP growth reaching 2.9% for the year, driven by strong consumer spending, business investment, and favorable tax policies. Additionally, the unemployment rate fell to 3.9%, indicating a tight labor market and contributing to economic confidence and dollar strength. Global trade tensions, particularly between the U.S. and China, created uncertainty in global markets, leading investors to seek the safety of the dollar.

 

Figure 6: BTC and DXY from 2017 to 2024

Data source: Yahoo Finance

 

Despite the Federal Reserve cutting interest rates three times in 2019 to between 1.50% and 1.75%, the US Dollar Index remained resilient. These cuts aimed to sustain economic expansion amid signs of a slowing economy and global trade uncertainties. The dollar's strength was supported by slower growth in other major economies, particularly in the Eurozone and emerging markets, making it more attractive to investors. Continued trade tensions with China also favored the dollar as a safe-haven asset. Domestically, approximately 3.5% unemployment rate and solid consumer spending contributed to economic stability.

 

The year 2020 was a period of significant global transformation, marked by the emergence of the COVID-19 pandemic. In response to the global economic downturn, the Federal Reserve implemented a series of interest rate hikes, leading to an all-time high for the US Dollar Index(DXY). In response to the dual challenges of inflation and rising unemployment, governments around the globe were compelled to implement economic policies designed to stabilize their respective economies. Despite a subsequent decline, the DXY remained at approximately 105. Bitcoin, which had experienced a notable increase in value before the pandemic, exhibited significant volatility throughout 2021 and 2022. In 2022, the value of Bitcoin fell by 64.07%, continuing a downward trajectory. However, it rebounded in early 2023, reaching an all-time high of $73,780.07 in early 2024. By July 12, 2024, the price of Bitcoin had retraced to approximately $57,000.

 

3.4 Modification of Interest Rate

Adjustments to the Federal Funds Rate have a notable impact on the U.S. dollar. When the Federal Reserve increases the Fed Funds Rate, it often results in higher economic interest rates. This scenario can make U.S. assets more attractive to foreign investors seeking better returns, leading to increased demand for the dollar. Conversely, a decrease in the Fed Funds Rate can lower overall interest rates, reducing the appeal of U.S. investments and potentially weakening the dollar. Raising interest rates can help curb inflation by making borrowing more expensive and slowing economic expansion. If the Fed hikes rates to manage inflation, it might indicate a robust economy or concerns about overheating, which can be positive for the dollar. However, if higher rates slow down economic growth too much, it might negatively impact the currency (Tarver, 2024). Figure 7 illustrates the impact of the Federal Reserve's monetary policy actions on the dollar index. As the Fed adjusts interest rates, a discernible shift in the dollar index can be observed. In each of the previous three phases, it has been observed that the implementation of different monetary policies by the Federal Reserve has resulted in fluctuations in the U.S. Dollar Index and Bitcoin. As of July 2024, US interest rates have remained stable at 5.33%. However, during a hearing in mid-July, Fed Chairman Powell indirectly indicated that a rate cut would be forthcoming in September of this year, which will undoubtedly weaken the US dollar if it starts to cut rates.

 

Figure 7: U.S. Dollar Index and Federal Fund Effective Rate

Data source: Federal Reserve, Yahoo Finance

 

Last but not least, the regulation of cryptocurrencies is being implemented, with governments around the globe introducing various laws and regulations to bring order compared to the previous state of chaos and disorganization. Some countries are gradually legalizing cryptocurrencies and launching derivatives such as Bitcoin Spot ETFs and Bitcoin Futures. The implementation of these laws and regulations has affected market sentiment and led to sharp fluctuations in the price of Bitcoin.

 

4. Bitcoin vs. U.S. Dollar Index: the Correlation for the Remainder of 2024

A correlation coefficient of 0.4 was observed between the two variables as of July 2024. This is because the US Dollar Index has been subject to fluctuations since the beginning of 2024, whereas Bitcoin, despite exhibiting a consistent upward trajectory and breaking records at the beginning of the year, subsequently experienced a rapid decline. The volatility increased gradually, followed by a downward trend in the subsequent months, resulting in a positive correlation coefficient.

 

Figure 8: 3-months Crypto Fear & Greed Index

Data source: alternative.me

 

It is likely that the U.S. Dollar Index will decline starting from August or September of this year. This is because the Federal Reserve has indicated that a rate cut may occur in September, although this might be the only one to take place during the year. Conversely, former U.S. President Donald Trump's favorable stance on cryptocurrencies has influenced overall market sentiment, suggesting the potential for Bitcoin to embark on a sustained recovery following the anticipated Fed rate cut. However, considering the entire year, the correlation coefficients have not yet reached a level of negative correlation, despite negative correlation coefficients over the past 30 and 60 days. Lastly, the gradual improvement of regulations and laws regarding cryptocurrencies will inevitably result in a resurgence of market volatility, accompanied by a rise in the Crypto Fear & Greed Index(Figure 8).

 

5. Conclusion

Overall, there will likely be a negative correlation between the price of Bitcoin and the U.S. Dollar Index throughout this year. The U.S. dollar will likely experience a decline in value while Bitcoin demonstrates an increase. In addition to the events of July, the cryptocurrency market will be characterized by positive sentiment, due to the endorsement of Bitcoin by Donald Trump and his emphasis on enhancing the regulatory framework for cryptocurrencies during the US election. Conversely, the Federal Reserve announced a reduction in interest rates in September, which may enhance capital liquidity and facilitate more efficient market operations. Investors are showing an increased willingness to invest in relatively high-risk products. On July 19th, Binance received approval from a U.S. court to utilize a portion of its customers' funds for investment in U.S. treasury bonds (SECURITIES AND EXCHANGE COMMISSION v. BINANCE HOLDINGS LIMITED , 2024), which further strengthens the connection between cryptocurrencies and the U.S. dollar. Consequently, it is possible to trade Bitcoin based on the movement of the US Dollar Index and predict the future trend of Bitcoin during trading. It is important to note that the US Dollar Index is only one of the factors that influence the price of Bitcoin. Additional factors, such as geopolitical changes, market sentiment, and other monetary policies, can also cause some volatility.

 

 

Reference

SECURITIES AND EXCHANGE COMMISSION v. BINANCE HOLDINGS LIMITED , 1:23-cv-01599 (District Court, District of Columbia July 26, 2024).

Sullivan, K. (2014, March). Nonfarm employment continued its road to recovery in 2013. Retrieved from U.S. BUREAU OF LABOR STATISTICS: https://www.bls.gov/opub/mlr/2014/article/nonfarm-employment-continued-its-road-to-recovery-in-2013.htm

Tarver, E. (2024, January 29). How Moves in the Fed Funds Rate Affect the U.S. Dollar. Retrieved from Investopedia: https://www.investopedia.com/articles/investing/101215/how-fed-fund-rate-hikes-affect-us-dollar.asp

Vernon Brundage Jr., Evan Cunningham. (2017, March). Unemployment holds steady for much of 2016 but edges down in the fourth quarter. Retrieved from U.S. BUREAU OF LABOR STATISTICS: https://www.bls.gov/opub/mlr/2017/article/unemployment-holds-steady-for-much-of-2016-but-edges-down-in-fourth-quarter.htm

 

 

Abstract

This research paper examines the relationship between Bitcoin and the U.S. Dollar Index (DXY) from 2012 to 2024. The analysis reveals that the price of Bitcoin and the DXY tend to move in opposite directions, influenced by factors such as Federal Reserve policies, geopolitical events, and market sentiment. We employed the Pearson correlation coefficient to determine the nature of the relationship between Bitcoin and the U.S. Dollar Index (DXY). The results indicate a predominantly negative correlation, with key periods illustrating the influence of economic events and policy changes on this relationship. The findings underscore the significance of understanding this inverse correlation for predicting future trends and making informed investment decisions. It is also important to consider the impact of other variables, including geopolitical shifts and regulatory developments, on Bitcoin's price movements.

 

1. Overview: Bitcoin’s Price and the U.S. Dollar Index

At the beginning of July, the Bitcoin market showed a notable lack of volatility. This was in contrast to the expectations of many market participants, who anticipated a significant increase in the price of Bitcoin following the fourth halving. As of July 10th, the price of Bitcoin had declined to $58,033.88, representing an approximate 8.62% decrease from its price immediately following the fourth halving. Our findings indicate that the US Dollar Index(DXY) and Bitcoin have exhibited opposing trends, with fluctuations occurring in opposite directions. To thoroughly examine this relationship, we have analyzed the correlation between Bitcoin and the U.S. Dollar Index since 2012. Furthermore, the underlying factors contributing to this inverse correlation offer insights into potential future developments.

 

Figure 1: The BTC and the U.S. Dollar Index

Data source: Yahoo Finance

 

2. Relationship: An Inverse Dance of Bitcoin and the U.S. Dollar Index

Historical analysis reveals an inverse correlation between Bitcoin's price and the US Dollar Index (DXY). A growing correlation between BTC and DXY was observed since late 2012. This marked the first significant interaction between these two previously unrelated economic indicators. Figure 2 provides a detailed illustration of the trends in BTC and DXY during 2012 and 2014. This figure offers the first substantial evidence of the inverse relationship between Bitcoin and the US Dollar Index. In the years that followed, the relationship between Bitcoin and the US Dollar Index exhibited a pattern of fluctuating values. While Bitcoin's rise over the past few years is noteworthy, the volatility caused by the US Dollar Index has had a significant impact on Bitcoin's performance.

 

In this section, we introduced the Pearson correlation coefficient to quantify the relationship between these variables. To avoid potential impacts from the extensive period on the data, we employed a methodology where the correlation coefficients were calculated based on data for each natural year. Both the US Dollar Index and the price of Bitcoin are subject to market fluctuations, changes in monetary policy, and other influencing factors. Aggregating data from all-natural years could result in a disproportionate impact of any single data fluctuation on the overall correlation coefficient. By analyzing data annually, we aim to capture a more accurate and nuanced understanding of the correlation between BTC and DXY, accounting for temporal variations and mitigating the impact of abnormal data points.

 

Figure 2: BTC and DXY from 2012 to 2014

Data source: Yahoo Finance

 

The correlation coefficients for each year are illustrated in Figure 3. The correlation coefficients between BTC and DXY exhibited a predominantly negative trend, although there were also some years in which a positive correlation was observed. Consequently, the data has been divided into three categories: the first encompasses the period between 2012 and 2014, the second encompasses the period between 2015 and 2016, and the third encompasses the period beginning in 2017. Furthermore, we calculated the correlation coefficients for 30, 60, and 90 days before the present time point for comparative analysis, the correlation coefficients are -0.1563, 0.4312, and -0.4116, respectively. As previously stated, an extended period for the data can introduce considerable noise, which can affect the correlation coefficients. The negative correlation between Bitcoin and the U.S. dollar persists despite recent fluctuations, though it has weakened somewhat compared to 90 days ago (-0.4116).  

 

Figure 3: Correlation Coefficient Between BTC and DXY

Data source: Yahoo Finance

 

In its latest statement, the Federal Reserve indicated a high probability of a rate cut in September of this year, while the current rate has stabilized at 5.33%, remaining within the Fed's 5.25% to 5.5% range. The following sections present an analysis of the fundamental reasons for the alteration in the correlation coefficients across the three stages, as well as an examination of the factors that contribute to this change. We will discuss in more detail the reasons that cause the fluctuation of BTC and DXY, and their change of correlation coefficient in the following section.

3. Behind the Market: A Comprehensive Analysis

In this section, we will undertake a detailed examination of the parsing of the three stages mentioned in the preceding. The primary factors influencing the correlation coefficients include but are not limited to, Federal Reserve policy, U.S. presidential elections, international political movements, and market sentiment.

 

3.1 Early Stage (2012-2014):

In 2012, Bitcoin completed its first halving, and its overall trend rose above $10. However, the correlation between Bitcoin and the US Dollar Index was not particularly strong, with an overall correlation coefficient of 0.0536 in that same year. In 2013, the suggestion by former Federal Reserve (Fed) Chairman Ben Bernanke to reduce bond purchases led to the “taper tantrum”, causing market volatility and a surge in the dollar as investors anticipated tighter monetary policy. This was confirmed in December when the Federal Reserve announced the start of tapering in January 2014, thereby reinforcing the move toward monetary normalization and strengthening the dollar. Meanwhile, the U.S. economy showed signs of recovery with stronger GDP growth, and improved employment reports (Sullivan, 2014), and advancements in the housing market. These developments rendered the dollar a more alluring investment vehicle for investors. In contrast, the Eurozone and Japan experienced economic stagnation, which, in conjunction with shifts in market sentiment, contributed to DXY volatility.

In 2014, the Fed continued tapering quantitative easing (QE), concluding the program in October, which further bolstered the dollar amid speculation about future interest rate hikes. In response to divergent monetary policies, the European Central Bank introduced negative interest rates and initiated an asset purchase program. Concurrently, the Bank of Japan augmented its quantitative easing (QE) initiatives, thereby diminishing the value of its currencies relative to the US dollar. The robust performance of the US economy, characterized by robust job growth and consumer spending, contrasted with the relatively sluggish growth observed in Europe and Japan, thereby reinforcing the dollar's appeal. Furthermore, geopolitical events, including the Russia-Ukraine conflict and instability in the Middle East, led to an increased demand for the US dollar as a Safe-Haven. These combined factors—monetary policy shifts, economic performance disparities, and geopolitical uncertainties—influenced the DXY's trajectory throughout 2013 and 2014, contributing to its ongoing volatility and strength.

 

3.2 Middle Development (2015-2016)

During the middle development, Bitcoin and the US dollar index have opposed trends. As Figure 3 illustrates, the correlation coefficient had a positive return in 2015 and 2016. Bitcoin demonstrated a strong upward period. Between 2015 and 2017, Bitcoin soared from $314.08 to $12,897.07, a gain of more than 97.56%. The US Dollar Index, on the contrary, was very volatile during these three years, especially until September 2016. The US Dollar Index fell sharply in the first and second quarters of 2017, despite a three-month gain before that.

 

We believe one of the reasons for a positive coefficient is market sentiment. The prevailing sentiment in the market exerts a considerable influence on the Bitcoin ecosystem. Positive market sentiment is often accompanied by notable shifts in the price of Bitcoin, whether it experiences an increase or a decline. Many investors attempt to generate profits through speculation rather than rigorous analysis. As Bitcoin's value increases, more individuals are likely to follow the trend of investing in Bitcoin and continue to speculate on its price. The rapid growth of Bitcoin in its current development phase has prompted many investors to take an interest, maintaining a positive market sentiment.

 

In late 2016, the US economy demonstrated robust performance across key indicators. Job growth remained strong throughout the year, with consistent additions to the workforce and an unemployment rate holding steady between 4.9% and 5%. This stability signaled a healthy labor market environment, bolstering overall economic confidence. GDP growth showed resilience, with a significant uptick in the third quarter reaching a revised growth rate of 3.5%, reflecting underlying economic strength and momentum (Vernon Brundage Jr., Evan Cunningham, 2017). Consumer confidence was high, as evidenced by the University of Michigan's Consumer Sentiment Index, Figure 5, which indicated increased optimism among consumers. This positive sentiment translated into heightened consumer spending, particularly during the holiday season, contributing to economic expansion. Moreover, industrial production saw improvements, with growth in manufacturing and mining sectors adding to the broader economic growth story.

 

Figure 4: BTC and DXY Between 2015 and 2016

Data source: Yahoo Finance

 

The 2016 U.S. presidential election significantly impacted financial markets. Donald Trump's victory in November sparked optimism due to his promises of substantial infrastructure investments, tax cuts, and deregulation. These policy announcements led to market rallies, with the S&P 500 and Dow Jones Industrial Average reaching record highs. The anticipated tax reforms and infrastructure spending fueled investor optimism, expected to spur business investments and consumer spending. Additionally, pledges to reduce regulatory burdens, particularly in financial services and energy sectors, were seen as catalysts for increased corporate profitability. This favorable regulatory outlook bolstered investor confidence and contributed to the appreciation of the DXY following the election.

 

Figure 5: 2015-2016 Consumer Sentiment Index

Data source: University of Michigan

 

3.3 Later Period (2017-2024)

Following 2017, Bitcoin entered a period of exponential growth, with the price exceeding previous record highs regularly. This was an outcome that had not been anticipated before 2017. Following the third phase, the relationship between BTC and DXY became increasingly correlated, with the correlation coefficient remaining below -0.5 except for 2019 and 2021. In 2022, the correlation coefficient reached an all-time low of -0.8506.

In 2018, DXY increased due to several factors. The Federal Reserve raised interest rates four times, bringing the federal funds rate to between 2.25% and 2.50%. These hikes were intended to prevent the economy from overheating and to control inflation, attracting foreign investment and boosting demand for the dollar. The US economy showed robust performance, with GDP growth reaching 2.9% for the year, driven by strong consumer spending, business investment, and favorable tax policies. Additionally, the unemployment rate fell to 3.9%, indicating a tight labor market and contributing to economic confidence and dollar strength. Global trade tensions, particularly between the U.S. and China, created uncertainty in global markets, leading investors to seek the safety of the dollar.

 

Figure 6: BTC and DXY from 2017 to 2024

Data source: Yahoo Finance

 

Despite the Federal Reserve cutting interest rates three times in 2019 to between 1.50% and 1.75%, the US Dollar Index remained resilient. These cuts aimed to sustain economic expansion amid signs of a slowing economy and global trade uncertainties. The dollar's strength was supported by slower growth in other major economies, particularly in the Eurozone and emerging markets, making it more attractive to investors. Continued trade tensions with China also favored the dollar as a safe-haven asset. Domestically, approximately 3.5% unemployment rate and solid consumer spending contributed to economic stability.

 

The year 2020 was a period of significant global transformation, marked by the emergence of the COVID-19 pandemic. In response to the global economic downturn, the Federal Reserve implemented a series of interest rate hikes, leading to an all-time high for the US Dollar Index(DXY). In response to the dual challenges of inflation and rising unemployment, governments around the globe were compelled to implement economic policies designed to stabilize their respective economies. Despite a subsequent decline, the DXY remained at approximately 105. Bitcoin, which had experienced a notable increase in value before the pandemic, exhibited significant volatility throughout 2021 and 2022. In 2022, the value of Bitcoin fell by 64.07%, continuing a downward trajectory. However, it rebounded in early 2023, reaching an all-time high of $73,780.07 in early 2024. By July 12, 2024, the price of Bitcoin had retraced to approximately $57,000.

 

3.4 Modification of Interest Rate

Adjustments to the Federal Funds Rate have a notable impact on the U.S. dollar. When the Federal Reserve increases the Fed Funds Rate, it often results in higher economic interest rates. This scenario can make U.S. assets more attractive to foreign investors seeking better returns, leading to increased demand for the dollar. Conversely, a decrease in the Fed Funds Rate can lower overall interest rates, reducing the appeal of U.S. investments and potentially weakening the dollar. Raising interest rates can help curb inflation by making borrowing more expensive and slowing economic expansion. If the Fed hikes rates to manage inflation, it might indicate a robust economy or concerns about overheating, which can be positive for the dollar. However, if higher rates slow down economic growth too much, it might negatively impact the currency (Tarver, 2024). Figure 7 illustrates the impact of the Federal Reserve's monetary policy actions on the dollar index. As the Fed adjusts interest rates, a discernible shift in the dollar index can be observed. In each of the previous three phases, it has been observed that the implementation of different monetary policies by the Federal Reserve has resulted in fluctuations in the U.S. Dollar Index and Bitcoin. As of July 2024, US interest rates have remained stable at 5.33%. However, during a hearing in mid-July, Fed Chairman Powell indirectly indicated that a rate cut would be forthcoming in September of this year, which will undoubtedly weaken the US dollar if it starts to cut rates.

 

Figure 7: U.S. Dollar Index and Federal Fund Effective Rate

Data source: Federal Reserve, Yahoo Finance

 

Last but not least, the regulation of cryptocurrencies is being implemented, with governments around the globe introducing various laws and regulations to bring order compared to the previous state of chaos and disorganization. Some countries are gradually legalizing cryptocurrencies and launching derivatives such as Bitcoin Spot ETFs and Bitcoin Futures. The implementation of these laws and regulations has affected market sentiment and led to sharp fluctuations in the price of Bitcoin.

 

4. Bitcoin vs. U.S. Dollar Index: the Correlation for the Remainder of 2024

A correlation coefficient of 0.4 was observed between the two variables as of July 2024. This is because the US Dollar Index has been subject to fluctuations since the beginning of 2024, whereas Bitcoin, despite exhibiting a consistent upward trajectory and breaking records at the beginning of the year, subsequently experienced a rapid decline. The volatility increased gradually, followed by a downward trend in the subsequent months, resulting in a positive correlation coefficient.

 

Figure 8: 3-months Crypto Fear & Greed Index

Data source: alternative.me

 

It is likely that the U.S. Dollar Index will decline starting from August or September of this year. This is because the Federal Reserve has indicated that a rate cut may occur in September, although this might be the only one to take place during the year. Conversely, former U.S. President Donald Trump's favorable stance on cryptocurrencies has influenced overall market sentiment, suggesting the potential for Bitcoin to embark on a sustained recovery following the anticipated Fed rate cut. However, considering the entire year, the correlation coefficients have not yet reached a level of negative correlation, despite negative correlation coefficients over the past 30 and 60 days. Lastly, the gradual improvement of regulations and laws regarding cryptocurrencies will inevitably result in a resurgence of market volatility, accompanied by a rise in the Crypto Fear & Greed Index(Figure 8).

 

5. Conclusion

Overall, there will likely be a negative correlation between the price of Bitcoin and the U.S. Dollar Index throughout this year. The U.S. dollar will likely experience a decline in value while Bitcoin demonstrates an increase. In addition to the events of July, the cryptocurrency market will be characterized by positive sentiment, due to the endorsement of Bitcoin by Donald Trump and his emphasis on enhancing the regulatory framework for cryptocurrencies during the US election. Conversely, the Federal Reserve announced a reduction in interest rates in September, which may enhance capital liquidity and facilitate more efficient market operations. Investors are showing an increased willingness to invest in relatively high-risk products. On July 19th, Binance received approval from a U.S. court to utilize a portion of its customers' funds for investment in U.S. treasury bonds (SECURITIES AND EXCHANGE COMMISSION v. BINANCE HOLDINGS LIMITED , 2024), which further strengthens the connection between cryptocurrencies and the U.S. dollar. Consequently, it is possible to trade Bitcoin based on the movement of the US Dollar Index and predict the future trend of Bitcoin during trading. It is important to note that the US Dollar Index is only one of the factors that influence the price of Bitcoin. Additional factors, such as geopolitical changes, market sentiment, and other monetary policies, can also cause some volatility.

 

 

Reference

SECURITIES AND EXCHANGE COMMISSION v. BINANCE HOLDINGS LIMITED , 1:23-cv-01599 (District Court, District of Columbia July 26, 2024).

Sullivan, K. (2014, March). Nonfarm employment continued its road to recovery in 2013. Retrieved from U.S. BUREAU OF LABOR STATISTICS: https://www.bls.gov/opub/mlr/2014/article/nonfarm-employment-continued-its-road-to-recovery-in-2013.htm

Tarver, E. (2024, January 29). How Moves in the Fed Funds Rate Affect the U.S. Dollar. Retrieved from Investopedia: https://www.investopedia.com/articles/investing/101215/how-fed-fund-rate-hikes-affect-us-dollar.asp

Vernon Brundage Jr., Evan Cunningham. (2017, March). Unemployment holds steady for much of 2016 but edges down in the fourth quarter. Retrieved from U.S. BUREAU OF LABOR STATISTICS: https://www.bls.gov/opub/mlr/2017/article/unemployment-holds-steady-for-much-of-2016-but-edges-down-in-fourth-quarter.htm