Bitcoin eyes gains as dollar index sinks to 21-year lows — Can BTC surge past all-time high?

A weakening U.S. dollar is opening the door for a possible new surge in Bitcoin, stirring questions about whether one of finance’s most familiar patterns is about to play out again.

That’s the view in a July 9 analysis shared by CryptoQuant contributor Darkfost, who points out that the U.S. Dollar Index has dropped to a historically weak level. It’s now sitting 6.5 points under its 200-day moving average, the largest gap seen in more than 21 years.

Some traditional markets may be concerned about this, but history shows that a declining dollar often creates an environment that is favorable for risky assets like Bitcoin (BTC). As traders move their money to assets that might hold value better during currency stress, Bitcoin has frequently increased in value.

For instance, when the DXY surged to a 20-year high of 114 in 2022, Bitcoin fell to roughly $16,000, but it bounced back above $40,000 when the dollar fell in late 2023. This trend has repeatedly occurred since 2015, with Bitcoin’s correlation to the dollar index typically ranging from -0.4 to -0.8.

Despite this backdrop, Bitcoin’s price hasn’t broken out just yet. At the time of writing, Bitcoin trades at $108,712, a small increase of 0.2% in the past 24 hours. It’s still only about 2.7% below its all-time high of $111,814 set on May 22. With volume dropping 18% in a single day to about $21.5 billion, trading activity has cooled off. 

The derivatives markets have also seen a slowdown in activity, as per data from Coinglass. Open interest has dipped slightly to $73.41 billion, while derivatives trading volume has decreased by roughly 12% to $55.3 billion. This implies that despite the dollar’s decline, traders are still being cautious for the time being.

On the technical side, Bitcoin’s signals are mixed. The market is neither significantly overbought nor oversold, according to the relative strength index, which is neutral at 56. Although the momentum indicator itself has entered negative territory, suggesting short-term hesitation, the MACD has turned positive, indicating some upward momentum is building.

Bitcoin is currently trading above all of its major moving averages, which typically denotes an overall upward trend and implies that any declines may quickly find support. A slight widening of the Bollinger Bands suggests that price volatility may increase soon.

Traders are keeping an eye on whether Bitcoin can break through resistance at $110,300 or if it will drop below support at $107,100. For the time being, the declining dollar creates favorable conditions for a possible Bitcoin rally. However, the speed at which traders take action may determine whether history repeats itself.