Bitcoin's Bullish Momentum Challenged by US Dollar Strength

The US Treasury market witnessed a decline in demand for long-dated securities on Feb. 20, raising concerns among investors. The S&P 500 index fell by 1%, while the US dollar weakened against a basket of foreign currencies, reaching its lowest level in 70 days. This development has led traders to question the potential impact on Bitcoin's price, given the positive correlation between the US Dollar Index (DXY) and Bitcoin over the past six months.

The DXY Index and Bitcoin's price have shown a positive correlation since September 2024, with both assets experiencing gains before facing challenges in maintaining their bullish momentum. Some analysts argue that the election of US President Donald Trump promotes fiscal discipline, which could lead to a stronger domestic currency. However, recent data suggests persistent inflation in the US and weaker retail sales, indicating a potential 'tagflation' ahead.

On Feb. 20, US Treasury Secretary Scott Bessent stated that the government is not yet moving toward issuing more long-term debt. He attributed the current situation to "Bidenflation" and noted that any shift to long-term bonds would depend on market conditions and inflation trends. Bessent also expressed concern about competing with the US Federal Reserve, which has been a "big seller" of government bonds.

The positive correlation with the DXY Index exerts downward pressure on Bitcoin’s price. However, this trend could weaken as investors shift their view of Bitcoin from a risk-on asset to a scarce hedge, similar to 'digital gold'. This shift is driven by several US states that have introduced legislation to allow Bitcoin to become a reserve asset. On Feb. 19, Montana's Business and Labor Committee passed a bill to create a special revenue account for investing in precious metals and Bitcoin.

The Bitcoin price move above $98,000 on Feb. 20 suggests that investors are increasingly recognizing its hard monetary policy. This is particularly relevant given the high risk of the US government adopting an expansionist monetary policy, such as issuing $5,000 checks to all US households. Investors' cautious sentiment is also evident in gold's price, as the precious metal reached an all-time high on Feb. 19.

Ultimately, Bitcoin's path to an all-time high depends largely on spot Bitcoin exchange-traded fund (ETF) inflows, the preferred vehicle for institutional investors. However, recent data shows net out