US Dollar Index Declines Further, Could Bitcoin Be Gearing Up for a Breakout?

The United States dollar index (DXY) has been on a decline over the past four months, recording its largest plunge in years. Since such moves have historically been correlated with positive growth in risk assets, bitcoin (BTC) could be gearing up for a strong breakout.

According to a report by the market analytics platform CryptoQuant, the correlation between a weak DXY and strong BTC has emerged multiple times in the past.

DXY Is Still Falling

With the U.S. debt hitting a new all-time high (ATH), the DXY has fallen to a historically weak level. The metric is currently trading around 6.5 points below its 200-day moving average. This marks its most significant deviation in the last 21 years.

CryptoQuant analyst Darkfost said that such DXY dips, while initially alarming, tend to benefit risk assets like BTC. Such periods are mostly favorable for the primary cryptocurrency. They also signal early bull market phases and seasons of euphoria, as the market sees an influx of liquidity. This is because the dollar loses its safe-haven appeal and investors begin to turn to risk assets.

“This is a well-known correlation in traditional finance. As the dollar weakens and loses its safe-haven appeal, investors reassess their portfolio allocations and shift capital toward alternative asset classes,” he stated.

An Imminent Breakout for BTC?

Although the market is currently in a phase where the weakness of the DXY could trigger a BTC rally, the price of the leading crypto asset is yet to react. BTC has been trading within a 10% range from $100,000 to $110,000 since the end of May. At the time of writing, the asset was worth $108,800, according to data from CoinMarketCap.

Market experts have insisted that there needs to be an increase in liquidity and demand before BTC can begin and sustain a price rally. While there is still a risk of significant correction, some analysts believe the asset has a higher chance of surging.

CryptoPotato reported yesterday that the bulls have structural control; hence, the underlying momentum during this consolidation phase is tilted to the bullish side. Regardless of bulls being in control, BTC still needs fresh catalysts or clearer macroeconomic signals to be able to rally to new highs.