Weaker dollar fails to boost bitcoin usual rally, and JP Morgan Private Bank explains the unexpected behavior as a window into the nature of the US currency’s decline.
The dollar index (DXY), which measures the dollar against a basket of peers, fell 10% last year. Bitcoin, which historically gains during periods of dollar weakness, lost 13% in the same period, CoinDesk data shows. The CoinDesk 20 Index (CD20), a measure of the largest digital assets, fell 28%.
The difference this time is that the dollar is being driven by short-term flows and sentiment rather than a change in growth or monetary policy expectations, and U.S. rate differentials are still moving in the dollar’s favor, according to bank 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.
“If anything, interest rate differentials have actually moved in favor of the dollar since the beginning of the year. What we are seeing now, just like last April, is a sell-off of the dollar driven primarily by flows and sentiment,” Tang continued.
The bank’s view is that the weakness will ultimately prove temporary, like last year, and that the dollar will eventually stabilize as the world’s largest economy gains momentum throughout the year.
That helps explain why bitcoin hasn’t behaved like a classic dollar hedge. While gold and other hard assets have rallied as the dollar has fallen, BTC has remained range-bound, suggesting that the cryptocurrency market does not view the dollar’s decline as a lasting macroeconomic shift.
As a result, bitcoin is still traded more as a liquidity-sensitive risk asset than a predetermined store of value operation. 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 replace flows and sentiment as the primary driver of currency markets, the largest cryptocurrency may continue to lag traditional macroeconomic hedges even if the dollar remains weak.
