The weaker dollar fails to spur bitcoins 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, has fallen 10% in the past year. Bitcoin, which historically gains during periods of dollar weakness, lost 13% over 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 shift in growth or monetary policy expectations, with US interest rate differentials still moving in the greenback’s favor, according to strategists at the bank.
“It is critical to note that the recent dollar slide is not about changes in growth or monetary policy expectations,” Yuxuan Tang, JP Morgan Private Bank’s head of macro strategy in Asia, said in a note shared with CoinDesk.
“If anything, interest rate differentials have actually moved in the USD’s favor since the start of the year. What we’re seeing now, just like last April, is a USD sell-off primarily driven by flows and sentiment,” Tang continued.
It is the bank’s view that the weakness will ultimately prove to be temporary, just like last year, and that the dollar will eventually stabilize as the world’s largest economy gets going over the course of the year.
That helps explain why bitcoin has not behaved like a classic dollar hedge. While gold and other hard assets have rallied as the dollar fell, BTC has remained range-bound, suggesting that the crypto market does not see the dollar’s decline as a lasting macro shift.
As a result, bitcoin still trades more like a liquidity sensitive risk asset than a standard trade of value. Without a clear shift in monetary policy expectations, dollar weakness alone has proven insufficient to draw new capital into the crypto markets.
JP Morgan Private Bank’s framework also points investors toward assets like gold and exposure to emerging markets as more direct beneficiaries of dollar diversification rather than bitcoin.
Until growth or interest rate dynamics take over from flows and sentiment as the primary driver of currency markets, the largest cryptocurrency may continue to lag behind traditional macro hedges even as the dollar remains soft.
