Dollar Weakness Fails to Boost Bitcoin usual rally, and JP Morgan Private Bank explains this unexpected behavior as a window into the nature of the decline of the American currency.
The Dollar Index (DXY), which measures the greenback against a basket of its peers, has fallen 10% over the past year. Bitcoin, which historically gains during periods of dollar weakness, lost 13% during the same period, according to CoinDesk data. The CoinDesk 20 Index (CD20), a measure of the largest digital assets, fell 28%.
The difference this time is that the dollar is driven by short-term flows and sentiment rather than a change in growth or monetary policy expectations, with U.S. rate differentials still moving in the dollar’s favor, according to the bank’s strategists.
“It is crucial to note that the recent decline in the dollar is not due to changes in growth or monetary policy expectations,” said Yuxuan Tang, head of macroeconomic strategy at JP Morgan Private Bank in Asia, in a note shared with CoinDesk.
“On the contrary, interest rate differentials have actually moved in favor of the dollar since the beginning of the year. What we are seeing today, just like last April, is a massive sell-off in the dollar, mainly driven by flows and sentiment,” Tang continued.
The bank believes the weakness will ultimately prove temporary, like last year, and that the dollar will eventually stabilize as the world’s largest economy regains strength throughout the year.
This helps explain why Bitcoin has failed to behave as a classic dollar hedge. While gold and other hard assets rallied as the greenback fell, BTC remained range-bound, suggesting that the crypto market does not view the dollar’s decline as a lasting macroeconomic change.
As a result, bitcoin still trades more as a liquidity-sensitive risk asset than a default store of value transaction. Without a clear change in monetary policy expectations, dollar weakness alone has proven insufficient to attract new capital to crypto markets.
JP Morgan Private Bank’s framework also directs investors toward assets such as gold and exposure to emerging markets as more direct beneficiaries of dollar diversification, rather than bitcoin.
Until growth or rate dynamics overtake flows and sentiment as the primary driver of foreign exchange markets, the largest cryptocurrency could continue to lag traditional macro hedges even if the dollar remains weak.
