US Dollar Index Drops 11% in 2025, Bitcoin Rallies as De-Dollarization Accelerates

Coin WorldWednesday, May 7, 2025 5:49 pm ET
2min read

The weakening of the US dollar (DXY) has become a notable trend, with the US Dollar Index dropping 11% since the start of 2025. This decline is part of a broader restructuring of the US economy and the global monetary order. Independent market analyst Lyn Alden argues that a weaker dollar may be necessary to stabilize the increasingly fragile financial system. The current system relies on continual credit expansion and refinancing, with the US holding around $102 trillion in public and private dollar-denominated debt, and another $18 trillion owed by borrowers outside the US. However, only $5.8 trillion in base money actually exists, creating a precarious situation where the system depends on constant liquidity.

The US plays a crucial role in this system, importing more than it exports and relying on surplus countries to funnel their dollar earnings back into American assets. When dollar liquidity tightens, foreign holders often have to sell these assets to service their debts, threatening US financial stability. This was evident during the COVID-19 pandemic when the Treasury market froze, leading the Fed to print trillions in base money to re-float the system, which in turn unleashed inflation. This situation, combined with industrial decline and widening social gaps, has created political pressure for protectionist measures. However, Alden argues that the only way to rebalance trade flows is through a weak dollar and a step back from monetary hegemony.

Bitcoin (BTC) and the DXY are inversely correlated, meaning that when the dollar strengthens, risk-on assets like BTC lose appeal, and when the dollar weakens, BTC becomes more attractive as an alternative currency. Historical data shows that major divergences between BTC and DXY often align with Bitcoin trend reversals. In the 2023-2026 cycle, BTC caught up with the DXY in early 2024, and the two moved largely in sync until a clear divergence began at the start of April 2025, with the DXY dropping below 100 for the first time in two years. This divergence could signal the start of a new BTC rally, especially if the US strategically weakens the dollar in the long term.

In a post-dollar era, periods of monetary upheaval are notoriously difficult to navigate. Longer-term strategies point to neutral, high-quality reserve assets, such as gold and Bitcoin. Several sovereign entities are already stockpiling Bitcoin, including El Salvador, Bhutan, and various investment funds and pension funds. With the dollar retreating from the global financial arena, space will open for other currencies, such as the yuan and the euro. This de-dollarization trend is unfolding in real time, with more examples of international trade deals settled in national currencies. Bitcoin's borderless and politically neutral nature positions it as a serious contender in this new financial landscape.