A stronger U.S. dollar typically leads to higher prices for dollar-denominated assets, such as Bitcoin and gold, resulting in decreased demand in the short term.
On the second-to-last day of the year, XRP saw the biggest losses among major cryptocurrencies, dropping over 5%, as a stronger dollar exerted pressure on global currencies and assets, including Bitcoin. This decline came as Asian stock markets experienced a downturn on Monday. Other notable cryptocurrencies, including Dogecoin (DOGE), Solana’s SOL, Ether (ETH), and Binance Coin (BNB), also dropped by up to 2%. Overall, the total market capitalization of cryptocurrencies fell by 3%, and the CoinDesk 20 (CD20) index, which tracks the largest tokens excluding stablecoins, dropped 3.5%.
U.S. stocks also faced a setback on Friday as investors adjusted their portfolios amidst year-end uncertainty. An index tracking Asia-Pacific stocks reversed gains from the past five days, while futures for U.S. indexes like the S&P 500 and Nasdaq indicated further declines in the upcoming U.S. trading session.
Bitcoin has historically shown an inverse relationship with the U.S. Dollar Index (DXY), which measures the dollar’s strength against major global currencies such as the euro.
The dollar’s current strength is largely driven by expectations surrounding President-elect Donald Trump’s policies, which are anticipated to stimulate economic growth in the coming years. When the dollar strengthens, assets like U.S. Treasuries and stocks become more appealing to investors compared to cryptocurrencies. As a result, traditional investments attract more attention, dampening optimism for a sustained crypto rally and leading to lower liquidity and year-end profit-taking.
The usual “Santa rally” that often boosts the market during December has failed to materialize this year, with Bitcoin seeing a nearly 4% decline this month. However, the cryptocurrency is still up 47% for the last quarter of the year. The crypto market’s downturn has also been influenced by expectations that the Federal Reserve may not continue with interest rate cuts in the near future.
Despite the challenges, some industry insiders remain optimistic about the long-term prospects of cryptocurrency. Maksym Sakharov, co-founder of WeFi, shared his thoughts with CoinDesk in a Telegram message: “Contrary to popular belief, Bitcoin and altcoins have not reached their peak prices, despite the ongoing consolidation triggered by last week’s interest rate cuts. The sell-offs are largely a reaction to market uncertainties surrounding macroeconomic policies. The Fed is preparing for higher rates next year, even with inflation nearing its 2% target, which could shift the direction of monetary policy and impact the market.”
Sakharov added, “However, with President-elect Trump taking office in the new year, we expect more corporate players to enter the Bitcoin space as favorable regulations take shape. If these projections come to fruition, Bitcoin’s price could decouple from macroeconomic factors and volatility, potentially offering a more stable long-term outlook.”
