Re-verification of the negative correlation between the US dollar and Bitcoin: How does the two-consecutive decline of the US Dollar Index affect crypto asset pricing?

As of June 29, 2026, the U.S. Dollar Index (DXY) stood at 101.39, declining for a second consecutive trading day with a daily drop of 0.07%. This price level means the DXY has retreated about 0.41 points from the 13-month high of 101.80 set on June 24.

Moving in sync with this is the U.S. Treasury yield curve. The benchmark 10-year Treasury yield closed at 4.371%, while the more Fed policy-sensitive 2-year Treasury yield closed at 4.098%. The modest decline in yields and the pullback in the dollar index form a mutually reinforcing macro signal—market expectations for further Fed tightening are marginally cooling.

From a technical perspective, the DXY is currently trading in the 101.30 to 101.40 range. The daily pivot point is at 101.321, with the corresponding support and resistance covering a maximum range of 100.561 to 102.121. This means the 101 level is the most critical short-term support area, while the previous high of 101.80 constitutes the main resistance above.

Although the two-day decline is modest—a cumulative drop of less than 0.3%—in the context of the DXY just hitting a new high in over a year, this change is enough to prompt a reassessment of the nature of the dollar's trend.

How Recent Economic Data and Energy Prices Affect Rate Hike Expectations

The immediate trigger for this pullback in the dollar index can be traced to data changes at two levels.

The first level is inflation and economic growth data. The U.S. May PCE price index rose 4.1% year-over-year, and the core PCE rose 3.4% year-over-year, both in line with market expectations. Although the absolute values remain well above the Fed's official 2% target, "in line with expectations" itself means the market did not find evidence of further deterioration in this data. DBS Bank research strategists noted that the PCE data suggests U.S. inflation may have peaked in May. When the trend of marginal deterioration in inflation data is interrupted, the market's urgency for further Fed rate hikes naturally diminishes.

The second level is the decline in energy prices. After the recovery in energy transport volumes through the Strait of Hormuz, oil prices have approached pre-conflict levels. Since energy contributes over 80% of the current inflation rebound, the drop in oil prices directly weakens the narrative logic of "runaway inflation—forced rate hikes." Consequently, the market's probability of at least two rate hikes by the Fed this year has fallen from 50.2% to 41.7%.

As of June 29, the CME FedWatch tool showed that the market expects a 69.5% probability of the Fed keeping rates unchanged in July and a 30.5% probability of a cumulative 25-basis-point hike. By September, the probability of rates remaining unchanged is 40.4%, and the probability of a cumulative 25-basis-point hike is 46.9%. Compared to right after the June FOMC meeting, market expectations for rate hikes have seen a certain degree of pullback.

It should be noted that this pullback is marginal and non-directional. The June FOMC meeting kept the federal funds rate target range unchanged at 3.50% to 3.75% by a unanimous 12-0 vote. The dot plot shows that half of the officials providing forecasts expect at least one rate hike this year; the median expectation for the end-of-2026 rate was raised from 3.4% to 3.8%. This means the door for rate hikes is not closed, but the market has found some temporary reasons to pause tightening based on short-term data.

Can the Short-Term Dollar Decline Change the Macro Pricing Direction?

To answer this question, it is necessary to distinguish between "marginal cooling of rate hike expectations" and "directional reversal of rate hike expectations."

The current pullback of the DXY from 101.80 to 101.39 reflects the former—the market has reduced the probability of the extreme scenario of "at least two rate hikes this year." But this does not equate to the market beginning to price in rate cuts or easing. In fact, just a month ago, the DXY was trading around 99.48. From the year's low of 99.6 to the year's high of 101.8, the DXY has completed a rally of over 2 points in 2026. Even after these two days of decline, the DXY remains in the high range since May 2025.

From an institutional perspective, there is clear divergence on the directional judgment. UBS believes the DXY has broken above the 2026 high and is likely to test the 102 level, with further upside potential for the dollar. In contrast, institutions like Cinda Securities judge that the dollar index may enter a wide-range consolidation phase in the second half of the year.

This means the current pullback is more likely to be interpreted as part of a high-level consolidation rather than the beginning of a trend reversal. A directional inflection point for the dollar would require stronger signals to confirm—such as a sustained decline in inflation data that beats expectations or a significant weakening in the labor market.

Is the Negative Correlation Between the Dollar and Bitcoin Strengthening?

The negative correlation between the dollar index and Bitcoin is one of the most closely watched relationships in macro analysis by crypto market participants. The basic logic is: a stronger dollar implies tighter global dollar liquidity and lower risk appetite, with funds flowing from high-risk assets like Bitcoin into dollar-denominated assets, and vice versa.

Based on the past year's data, this relationship not only exists but is also strengthening. During the period from June 2025 to May 2026, the daily negative correlation coefficient between DXY and BTC was approximately -0.72. This means that when DXY rises by one standard deviation, Bitcoin prices tend to move in the opposite direction by about 0.72 standard deviations. This value is significantly higher than the long-term historical average (around -0.5 to -0.6), indicating that the suppressing effect of a strong dollar on the crypto market has been amplified over the past year.

The trends since 2026 provide the latest validation. As the DXY steadily strengthened from the year's low of 99.6 to 101.8, Bitcoin faced sustained downward pressure. When the DXY hit a 13-month high of 101.80 on June 24, Bitcoin was fluctuating around $59,400, down over 52% from its all-time high of $126,223 in October 2025.

Of course, the negative correlation coefficient is not constant. For most of 2024, the two moved in the same direction, and it was not until the dollar index pulled back significantly in March 2025 that the negative correlation became prominent again. This volatility itself indicates that the DXY-BTC correlation is the result of multiple factors—Fed interest rate policy, inflation stickiness, and global capital flows—rather than a simple linear relationship.

How Do Rate Expectations Transmit to Crypto Assets Through Three Channels

The impact of dollar trends on the crypto market is not abstract market sentiment but is transmitted through three specific and verifiable channels.

First channel: Rising risk-free rates increase holding costs. When the dollar strengthens and Treasury yields remain high, the opportunity cost of holding non-yielding assets like Bitcoin rises significantly. At the 2-year Treasury yield of 4.098%, the annual opportunity cost of holding one Bitcoin is approximately $2,600. At the beginning of 2026, the market originally expected more than two rate cuts during the year, but the market has now fully priced in the possibility of a Fed rate hike this year. This 180-degree reversal in expectations means that the holding cost environment for Bitcoin has fundamentally changed within half a year.

Second channel: Tightening global dollar liquidity. A stronger DXY is usually accompanied by a systemic tightening of global dollar liquidity. When the dollar becomes "more expensive," emerging market countries face capital outflow pressures, and the cost of servicing dollar-denominated debt rises. The crypto market, being highly sensitive to liquidity, bears the brunt of this process. After new Fed Chair Warsh took office, not only was the benchmark rate kept unchanged, but the pace of balance sheet reduction was also accelerated. Balance sheet reduction effectively withdraws funds directly from financial markets, and cryptocurrencies, as an area extremely sensitive to liquidity, face clear liquidity pressure.

Third channel: Systemic decline in risk appetite. A stronger DXY is both a result of declining risk appetite and a further cause of suppressing risk appetite, forming a positive feedback loop. When investors face a risk-free rate of over 4%, their willingness to allocate to volatile assets like Bitcoin naturally decreases. This effect is particularly evident in emerging markets—the MSCI Emerging Market Currency Index fell for four consecutive trading days, and emerging market ETFs experienced capital outflows for four consecutive weeks.

These three channels reinforce each other, forming a complete logical chain for the pressure on the crypto market during a strong dollar cycle.

Key Macro Variables Going Forward from 101.39

The direction of the DXY at the 101.39 level will depend on the evolution of several key variables over the coming weeks.

The first variable is labor market data. The June nonfarm payrolls report will be released on July 2, and the market expects job additions to drop from 175k in May to 115k. If the employment data is significantly weaker than expected, it could further weaken the rate hike logic, pushing the DXY to test the support area of 101 or even 100.5. Conversely, if the employment data exceeds expectations again, it could rekindle rate hike expectations, pushing the DXY back to 101.80 or even challenging the 102 level.

The second variable is the subsequent evolution of inflation data. The June CPI data will be released on July 14. Given that oil prices have already fallen, inflation pressures in the following months may ease. If CPI data shows continued cooling of inflation, market expectations for rate hikes will decline further; however, if core inflation remains stubborn, the Fed's tightening logic will not be shaken.

The third variable is the communication and statements from Fed officials. After taking office, Chair Warsh explicitly abolished forward guidance, arguing that the market should shift from "relying on the Fed to provide a path" to "pricing based on economic data." This means that future policy paths will depend more on the data itself rather than the Fed's prior commitments. Under this new paradigm, each release of important economic data could trigger a repricing of market expectations, thereby driving DXY volatility.

From a longer-term perspective, the core driver of this dollar strength is energy inflation caused by geopolitical conflicts. If geopolitical tensions continue to ease and energy supply continues to recover, the relief of inflation pressures will fundamentally weaken the basis for dollar strength. But this process takes time and involves high uncertainty.

High-Level Consolidation or Trend Reversal?

Based on the above analysis, the two-day pullback of the DXY from 101.80 to 101.39 currently leans more toward being a "technical correction within a high-level consolidation" rather than a substantial reversal of the dollar's trend.

Reasons supporting this judgment include: although rate hike expectations have marginally cooled, the direction has not reversed—the market still prices about a 47% probability of a Fed rate hike in September; the DXY remains in its high range since 13 months ago; and major institutions' views on the dollar's medium-term outlook are still mostly leaning toward strength or consolidation.

However, the validity of this judgment is conditional. If subsequent nonfarm payroll data is significantly weaker than expected, or CPI data shows a faster decline in inflation, then the "breather" could evolve into an "inflection point." For the crypto market, this means that every fluctuation in the DXY is not just an internal event in the foreign exchange market but a core variable that transmits to the pricing of crypto assets like Bitcoin through the triple pathways of rate expectations, liquidity, and risk appetite.

In the current macro environment driven by data-driven pricing, the battle for the DXY at the 101 level is essentially an important preview of the Fed's next policy direction.

Conclusion

The dollar index fell for two consecutive days to 101.39, with the immediate trigger being the marginal cooling of rate hike expectations due to PCE data meeting expectations and falling energy prices. On the data front, the market's probability expectation for a Fed rate hike in September has slightly pulled back from the post-FOMC meeting high; on the structural front, the DXY remains in its 13-month high range, and a directional inflection point requires stronger data signals to confirm.

For the crypto market, dollar trends are transmitted to assets like Bitcoin through the three channels of risk-free rates, global liquidity, and risk appetite. The negative correlation coefficient of approximately -0.72 between DXY and BTC over the past year indicates that the influence of this macro variable on crypto asset pricing is strengthening rather than weakening.

Key variables to track going forward include: the July nonfarm payroll data, the June CPI data, and the evolution of Fed officials' statements under the new data-driven paradigm. These variables will collectively determine whether 101.39 is a brief breather or the starting point of a larger pullback.

Frequently Asked Questions (FAQ)

Q1: Is the dollar index falling to 101.39 bullish for Bitcoin?

Based on the historical negative correlation, a decline in the DXY usually provides support for Bitcoin. The negative correlation coefficient between DXY and BTC over the past year is approximately -0.72, meaning that when the dollar weakens, Bitcoin tends to move in the opposite direction. However, note that the two-day decline is limited (less than 0.3%), and the DXY remains at a 13-month high, so it is not yet sufficient to constitute a trend-positive signal.

Q2: What is the current probability of a Fed rate hike in September?

As of June 29, 2026, the CME FedWatch tool shows that the market expects a 46.9% probability of a cumulative 25-basis-point rate hike in September, a 12.8% probability of a cumulative 50-basis-point hike, and a 40.4% probability of rates remaining unchanged.

Q3: Will the dollar index continue to fall?

This depends on the evolution of subsequent economic data. Short-term key variables include the July nonfarm payroll data and the June CPI data. If employment weakens significantly or inflation falls faster, the DXY could further test support at 101 or even 100.5; if data remains strong, the DXY could return to 101.80 or even challenge the 102 level.

Q4: Why does a stronger dollar suppress crypto assets?

Mainly through three pathways: first, raising risk-free rates increases the opportunity cost of holding non-yielding assets like Bitcoin; second, tightening global dollar liquidity reduces the supply of funds to the crypto market; third, systematically suppressing risk appetite lowers investors' willingness to allocate to high-risk assets.

Q5: Where are the key support and resistance levels for the DXY currently?

Based on June 29 data, the DXY daily pivot point is at 101.321, with the lower support range around 100.561 and the upper resistance range around 102.121. In the short term, the 101 level is the primary support, while the previous high of 101.80 is the main resistance.