After the conclusion of the US presidential election, Bitcoin surged, hitting new all-time highs, and it is now just one step away from reaching $100,000. While investors remain confident in the four-year halving cycle theory, they also closely monitor macroeconomic indicators such as the US Dollar Index (DXY) and non-farm payroll data, assessing their impact on the cryptocurrency market, led by Bitcoin.

This article will provide a comprehensive analysis of the US Dollar Index (DXY), exploring its basic concept, historical development, and influencing factors. It will also examine the relationship between the performance of cryptocurrencies like Bitcoin and the US Dollar Index, with the goal of offering valuable insights for crypto investors.

What is the US Dollar Index (DXY)?

The US Dollar Index, also known as USDX or DXY, is a comprehensive measure of the strength of the US dollar in the international foreign exchange market. It gauges the dollar’s exchange rate fluctuations against a basket of major currencies. The index is composed of six major currencies: the Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swiss Franc (CHF), and Swedish Krona (SEK). Each of these currencies has a specific weight within the index, as follows:

The calculation of the US Dollar Index is based on the exchange rate changes of the currencies listed above relative to the US dollar, and the formula is as follows:

The Development of the US Dollar Index

The US Dollar Index (DXY) was a product of the collapse of the Bretton Woods system. In the 1960s and 1970s, the United States faced massive fiscal deficits due to factors like its involvement in the Vietnam War, leading to a deterioration of its international income and severely undermining the dollar’s credibility. This situation triggered multiple dollar crises. In 1971, the US announced the suspension of the dollar’s convertibility into gold, which caused exchange rate fluctuations, making the value of various currencies relative to the US dollar more unstable.

At that time, there was an urgent need for a tool to measure the strength of the US dollar relative to other major currencies, and thus the US Dollar Index was created. Initially launched in 1973 by the New York Cotton Exchange (NYCE), which merged with the Intercontinental Exchange (ICE) in 2006, the index was adjusted in 1999 after introducing the Euro. The original index, which included ten countries, was reduced to six, with the Euro becoming the most significant and weighted currency.

The US Dollar Index has always used the exchange rates from 1973 as its benchmark, with an initial base level of 100. This means that if the current US Dollar Index is 106, it indicates that the dollar has appreciated by 6% relative to 1973. Conversely, if the index drops to 90, it means the dollar has depreciated by 10%.

Looking at the historical data of the Dollar Index, it reached a low of 70.7 in 2008 and peaked at 164.72 in 1985. As of now, it stands at 107.4, marking its highest point since November 2023.

Source: TradingView

Factors Influencing the US Dollar Index

As the most widely circulated currency in the world today, the US dollar holds a crucial position as the base currency in global foreign exchange transactions. Changes in the US Dollar Index reflect the strength or weakness of the dollar itself and can have a significant impact on global financial markets, including stocks, bonds, gold, oil, and cryptocurrencies. Both governments and individual investors need to monitor the Dollar Index to better understand economic dynamics and market trends, and to adjust and devise strategies accordingly.

Typically, when the US Dollar Index rises, it indicates that the dollar is strengthening relative to most other currencies, leading to the inflow of capital into the US. Conversely, when the Dollar Index falls, it suggests that the dollar is weakening relative to other currencies, and capital may flow out of the US.

So, what factors influence the fluctuations of the US Dollar Index?

1. Monetary and Interest Rate Policies
   The Federal Reserve’s interest rate decisions and changes in monetary policy have a direct impact on the US Dollar Index. Generally, if the Federal Reserve raises interest rates, it tends to attract foreign investors to purchase US dollar-denominated assets, thereby driving the dollar’s value up. On the other hand, a rate cut may lead to a weaker dollar.

2. Economic Data
   The US Dollar Index is also influenced by various macroeconomic indicators, such as GDP, non-farm payroll data, unemployment rates, and inflation metrics like the Consumer Price Index (CPI). If the US GDP grows or domestic employment data is strong, market confidence in the dollar typically increases, causing the Dollar Index to rise. Conversely, if economic data signals weakness in the US economy, the Dollar Index may decline. Additionally, rising inflation may lead markets to expect interest rate hikes from the Fed, which could also drive the dollar stronger.

3. Political Factors
   Political stability and international relations play a role in influencing the Dollar Index. In times of political instability or escalating geopolitical events (such as wars or trade disputes), investors may seek safe-haven assets, which can affect demand for the dollar and impact the index’s performance.

4. Market Sentiment
   Market sentiment and investors’ risk appetite can influence the dollar’s demand. When market uncertainty increases, investors tend to flock to safe-haven assets like the US dollar, pushing the Dollar Index higher.

In conclusion, a combination of factors influences the US Dollar Index, and no single event can determine its movement. Investors need to consider these multiple variables to better manage both risks and opportunities.

The Relationship Between the US Dollar Index and the Crypto Market

As a key tool for assessing the relative value of the US dollar, the US Dollar Index has a broad impact on global financial markets, and the crypto market is no exception. Especially since the second half of this year, significant events like interest rate cuts and the US presidential election have unfolded one after another. When combined with the halving cycle theory of Bitcoin, these factors have made the market trends for cryptocurrencies, particularly Bitcoin, more unpredictable.

Bitcoin, as the leader of altcoins, largely dictates the direction of the overall cryptocurrency market. As seen in the chart, the total market capitalization of cryptocurrencies aligns closely with the movements of Bitcoin. Below, we will specifically analyze the relationship between Bitcoin’s price and the US Dollar Index.

Source: TradingView

Some analysts believe that the US Dollar Index and the crypto market show a negative correlation. When the Dollar Index weakens, it implies a depreciation of the dollar, which may lead investors to turn to riskier assets, thus driving up the price of Bitcoin and other cryptocurrencies. Conversely, the opposite is also true.

However, as shown in the chart below, the two movements are not always negatively correlated, and there are many periods where they exhibit synchronized trends.

Source: TradingView

For example, from March 2020 to March 2021, Bitcoin’s price surged from a low of around $3,800 to over $60,000, marking an increase of about 15 times. During this period, the US Dollar Index generally exhibited an inverse trend to Bitcoin, falling from a high of 102 to a low of 89.

From mid-to-late July 2021 to early November 2021, during a period of price fluctuations and upward movement in Bitcoin, the US Dollar Index and Bitcoin’s price trends were largely aligned, rising from 92 to around 95.

However, from early November 2021 to September 2022, a negative correlation between the two emerged again. Bitcoin’s price dropped from a high near $70,000 to below $20,000, while the Dollar Index continuously rose, increasing from a low of 94 to 114, reaching a nearly 20-year high.

Looking back at recent trends, since September 2023, the US Dollar Index has once again shown a positive correlation with Bitcoin’s price. The Dollar Index has risen from a low of 100 to its current level of 107, while Bitcoin’s price has surged from below $60,000 to its current price of $99,100, setting a new all-time high.

This unpredictability makes using the US Dollar Index alone to predict cryptocurrency market trends more complex and challenging. Apart from the Dollar Index, the crypto market is also influenced by other factors, including:

Evolution of Legalization

With the approval of a spot Bitcoin ETF and ongoing regulatory advancements, Bitcoin’s liquidity and market size have grown. The influx of institutional participants could reduce Bitcoin’s volatility, leading to more stable price performance, potentially even aligning more closely with the movements of the US stock market.

The Arrival of Interest Rate Cuts

On September 18, 2023, the Federal Reserve announced a 50 basis point reduction in the benchmark interest rate, marking its first rate cut in four years and signaling the official start of a monetary easing cycle in the US since March 2020. Generally, rate cuts push the US dollar down, which can benefit risk assets like Bitcoin.

Previously, hedge fund founder Anthony Scaramucci of SkyBridge said in an interview that, with a series of rate cuts from the Fed and clearer regulatory guidance for US cryptocurrencies, Bitcoin could reach $100,000 by the end of the year.

Positive Signals from the US Administration

Re-elected President Donald Trump has shown a favorable stance toward the crypto market, and his party, the Republican Party, has proposed several policies to support the development of digital assets, such as creating a national Bitcoin reserve and establishing a Digital Asset Advisory Committee.

Bitcoin’s Halving Cycle Theory

As “digital gold” and with more innovative solutions emerging, Bitcoin’s value continues to grow. In April this year, Bitcoin underwent its fourth halving, and in the past, each halving has been followed by a significant price increase.

For cryptocurrency investors, in the face of a more complex market, it’s crucial to maintain keen market insights, considering multiple factors such as the US Dollar Index, cryptocurrency policies, and interest rate policies. Investors should remain flexible in responding to market changes. Additionally, risk management and diversification of investment portfolios are essential. Investors should craft reasonable strategies based on their risk tolerance and adjust them promptly.

Conclusion

As one of the key macroeconomic indicators, the US Dollar Index not only reflects the strength of the US dollar but also triggers a series of cascading effects on global financial markets. While its influence on cryptocurrency is not always linear or predictable, crypto investors should not overlook its importance. They should consider a wide range of factors, including the US Dollar Index, and combine both fundamental and technical analysis to adjust their trading strategies in a timely manner.