Chart of the Week | Dollar Strength vs Bitcoin

Good morning everyone and welcome to our “Chart of the Week” series! Every week we provide you with the most informative Bitcoin charts, sent directly to your inbox.

This week we dive into Dollar strength vs Bitcoin to better understand the relationship between two of the most interesting macro assets in today’s financial landscape.

Let’s dive in!

Dual Perspectives

When a normal everyday American hears about ‘the dollar’, they often interpret such discussions based on the purchasing power of their paycheck. However, while purchasing power is an important metric, it’s not the way the dollar is viewed in typical finance circles.

In finance and economics, all currencies are valued relative to other fiat currencies due to the interconnected nature of the modern economy, i.e. globalism. This is what talks of ‘the dollar’ are often referring to.

Unfortunately, the purchasing power of everyday Americans is not treated with the respect that it deserves (see below the declining value of the dollar in red).

The “Dollar Index”

Instead, ‘the dollar’ is often measured by two different metrics specific in traditional finance (“TradFi”), namely:

• The DXY index; and

• The Trade-weighted dollar index

The DXY is the most often used, and measures the dollar versus other currencies. The weight of those other fiat currencies within the DXY index are primarily:

1. Euro (57%)

2. Japanese Yen (14%)

3. British Pound (12%)

4. Canadian Dollar (9%)

However, I believe a more useful way to look at the dollar is via the trade-weighted dollar index, which is weighted where each currency pair that makes up the index, is given a weighting by the share of exports/imports that go to/from that country. If the US does 20% of its trade with Europe, then the Euro/USD pair would be given a 20% weighting.

Both metrics are giving a very clear signal over the past few weeks: the dollar is incredibly strong (green line below).

Why Does the Dollar Matter?

The debate over whether bitcoin is a reserve asset or a currency, will likely continue to drag on for the rest of the decade. To keep things simple, I am not taking a personal opinion on this debate, but rather simply pointing out certain correlations and the importance the dollar has on the fiat price that we observe on a daily basis.

As a (very) brief explanation, over 50 years ago, the US went around the world and encouraged the rest of the world to adopt the dollar. Today, over 75% of global trade is denominated in dollars. There is no official data on the scale of the Eurodollar system, but estimates are that over $20 trillion dollars’ worth of dollar-denominated debt is held by foreigners.

This means that as the dollar gets stronger against another currency, it takes more of that local currency to buy the goods and services that the entity needs, and makes it more difficult to service dollar-denominated debts.

Imagine you are a manager at a car company that makes €100,000 per year. Now, imagine the dollar and the Euro are at parity (USD/EUR = 1). Next, imagine you’ve found an American sports car that you want to purchase. At the current exchange rate, you can buy 1 car per year, assuming no other expenses.

However, now let’s imagine that the Euro weakens by 50%, and falls down to 0.5 USD/EUR. You still get paid in Euros, but now that car costs two years’ worth of your salary to purchase.

This is of course very simplistic, but when you expand the above example to include tens of trillions of dollars’ worth of commodities, goods, debts, etc., it becomes clear why a rising dollar can have such profound impacts on the rest of the world. A rising dollar essentially ‘squeezes’ the purchasing power of the rest of the world.

Bitcoin vs the Dollar

Since the Federal Reserve started to cut interest rates in September of 2024, the trade weighted dollar is up over 7% (which is a significant move in the context of currencies). We have also seen Bitcoin’s bullish trend, start to slow. We know there are a multitude of items that contribute to Bitcoin’s fiat price, but I do believe that as it become more widely adopted via traditional finance, traditional metrics become more important.

Traditional risk assets like the S&P have long had an inverse relationship (broadly speaking) with the dollar, given the large multinationals that do overseas trade, and their weight within our equity indices. As the world is squeezed, less dollars are available to go into equities (or other ‘risk on’ assets, like bitcoin). Additionally, these multinational companies do less business overseas, as the dollar strengthens.

Whether or not bitcoin fully adopts a strong inverse correlation with the dollar, a general trend is clear: periods of time where the dollar makes sharp, prolonged moves up, bitcoin faces difficulty. Conversely, when the dollar is weakened, bitcoin’s price tends to perform very well to the upside.

Where to from here?

While no one knows exactly where the dollar will move in the short term, it is widely believed that the dollar should strengthen over longer term horizons based on the USA’s global exceptionalism and strong growth (relative to rest of the world). Additionally, tariffs would also likely cause more dollar strength, as would spending cuts and a more responsible fiscal approach.

On the other hand, if the dollar gets too strong, the effects can cause significant harm to not just US-based risk assets like the equity markets (which drive a significant portion of government revenue), but the global financial system overall. A strong dollar also hurts American companies’ exports to the rest of the world (thus countering president Trump’s “MAGA” mantra).

The next year with the incoming administration could bring significant volatility in regard to the dollar. We’ve already seen some pretty notable moves in currencies, preemptively pricing in much of the policies that the market expects.

Given recent years, it would seem that bitcoin investors would do well to keep an eye on the incoming administration and their monetary, fiscal and trade policies, as it seems clear that there is a notable relationship between the dollar, and the bitcoin price.

That’s it from us this week - remember, stay humble and stack sats!