- The U.S. Dollar Index looks to have bottomed out and begun a reversal
- It has broken out of a two-month bottoming range and has cleared crucial resistance levels
- Bitcoin and precious metals could be in trouble if it continues
The U.S. Dollar Index seems to have begun a reversal that could spell trouble for Bitcoin in the coming weeks and possibly months. Having been on a sharp downward trend since early March, the U.S. Dollar Index yesterday broke out of a clear bottoming structure and looks set to cause pain to holders of Bitcoin and precious metals.
U.S. Dollar Index is On the March
As we can see, the U.S. Dollar Index has been in a very clear channel since late July, having dropped over 11.5% since March. Following a number of failed attempts to break out of this channel, yesterday it finally managed, overcoming two resistance levels at the same time:
In the short term there is nothing to stop it moving up to 94.81, and on a higher timeframe, there is barely any resistance until 95.71:
Watch Out Bitcoin
Why would such a move be bad for Bitcoin? As we have discussed in the past, the U.S. Dollar Index is inversely correlated with Bitcoin, which means that, generally speaking, when the dollar goes up Bitcoin goes down and vice versa:
Operating as a hedge to the traditional financial system, this means that the U.S. Dollar Index is the driving force, not the other way round – Bitcoin and metals react to the dollar, rather than the other way round.
We pointed out at the end of August that the dollar was on the rise, and we can see stronger evidence of this in this current move:
Between August 27 and September 1, the U.S. Dollar Index (green and red candles) fell from 93.32 to 91.75. During the same period Bitcoin (blue line) jumped from $11,325 to $11,945.
Since that point, the U.S. Dollar Index has been on the rise, moving from 91.75 to 94.12 this month. During the same period Bitcoin has dropped from $11,945 to $10,465. This is not coincidence – gold and silver has also fallen since the start of the month.
If the U.S. Dollar Index really is in line for an extended run then there is every chance that we could see a rush from hedging assets into the dollar in the coming weeks.
Coronavirus Stimulus Could Save Bitcoin
There could still be a silver bullet for Bitcoin holders however – should the U.S. government announce another trillion-dollar coronavirus stimulus deal then the value proposition of the dollar would take another severe hit, dropping the U.S. Dollar Index again and giving hedges like Bitcoin a chance at recovery.
For the time being however, it seems that the greenback is going to keep Bitcoin caged, which represents a good time to accumulate.