A stronger dollar has historically pressured dollar-denominated assets like Bitcoin and gold, making them more expensive and dampening short-term demand.
On the penultimate day of the year, XRP led cryptocurrency market losses as a strengthening U.S. dollar exerted downward pressure on global currencies and risk assets, including Bitcoin. Asian equity markets also saw a decline on Monday.
XRP dropped over 5% in the past 24 hours, while other major cryptocurrencies, including Dogecoin (DOGE), Solana’s SOL, Ether (ETH), and BNB, recorded losses of up to 2%. The overall cryptocurrency market capitalization fell by 3%, while the CoinDesk 20 (CD20) index, which tracks the largest non-stablecoin tokens, slipped by 3.5%.
U.S. equities ended lower on Friday, with investors pulling back amid uncertainty as the year draws to a close. An Asia-Pacific index reversed a five-day winning streak, and futures tied to the S&P 500 and Nasdaq indicated further losses for the upcoming U.S. session.
Bitcoin has historically exhibited an inverse correlation with the U.S. Dollar Index (DXY), a benchmark tracking the dollar’s strength against major global currencies.
The dollar’s recent strength is tied to anticipation around President-elect Donald Trump’s incoming administration and its promised economic stimulus and pro-growth policies.
In periods of dollar strength, traditional assets like U.S. Treasuries and equities often become more attractive than cryptocurrencies, as they offer yields supported by a robust dollar.
This environment has tempered expectations for an extended crypto rally, particularly amid thin market liquidity and year-end profit-taking by investors. The so-called ‘Santa rally’ — a common seasonal uptrend in December — has failed to materialize, with Bitcoin down nearly 4% this month. Nevertheless, Bitcoin remains up 47% for the final quarter.
Additionally, scaled-back expectations for aggressive Federal Reserve interest-rate cuts have added to downward pressure on Bitcoin and the broader crypto market in recent weeks.
Despite these short-term headwinds, some analysts remain confident in the long-term outlook for cryptocurrencies. Maksym Sakharov, co-founder of WeFi, told CoinDesk via Telegram:
“The recent sell-offs are largely a reaction to macroeconomic uncertainties rather than an indication of Bitcoin hitting its peak. Inflation is nearing the Fed’s 2% target, but the central bank remains cautious. Monetary policy adjustments in 2024 could shift market dynamics.”
Sakharov also highlighted potential regulatory developments under the incoming administration:
“With President-elect Donald Trump taking office next year, we expect a more favorable regulatory climate for corporate Bitcoin adoption. This could drive further institutional participation and potentially reduce Bitcoin’s sensitivity to macroeconomic pressures, fostering a more stable growth trajectory.”
