Bitcoin {{BTC}} is taking a bull breather at the $90,000 resistance level CoinDesk identified last week as foreign-exchange traders focus on the rally in the dollar index (DXY), raising the risk of financial tightening that often weighs on risk assets.
Since early Tuesday, bitcoin's supposedly euphoric rise has hit a snag at the $90,000 barrier, with prices briefly dipping to $85,000, CoinDesk data show .
It's completely normal for such a pause to occur after a staggering $20,000 price surge in just a week, shattering previous lifetime peaks. Such pauses typically recharge bulls' engines for the next leg higher and traders in the options market are positioning for a breakout to $110,000-$120,000, according to data shared by QCP Capital.
Betting on a dollar rally
Still, it could be more than coincidence that the rally has paused alongside reports of traders betting on a continued rise in the dollar index, which tracks the U.S. currency's value against major fiat currencies.
"Traded levels of volatility are rising notably as it seems the market is actively positioning (investors) or hedging (corporate treasurers) in expectation of a stronger dollar," ING said Tuesday. "All we would say here is not to fight this emerging trend."
Both BTC and USD, part of the so-called " Trump trades ," have surged since Donald Trump's victory in the U.S. election held a week ago. The DXY has risen by 2.7% to 106.78, hitting a six-month high, according to TradingView.
Persistent dollar strength, however, could restore the historical negative correlation between the two and at least slow down BTC's ascent, if not halt it altogether.
That's because the U.S. dollar is a global reserve currency with an outsized role in global trade, international debt and non-bank borrowing. An appreciating dollar commonly has investors with dollar-denominated debt and servicing costs trim exposure to riskier assets such as stocks and cryptocurrencies.
Hardening bond yields
Yields on U.S. Treasury notes are also hardening, providing additional support for the dollar. The yield on the two-year note rose to 4.36% Tuesday, the highest since July 31. The 10-year note bounced close to the multimonth high of 4.46% seen a week ago.
The market action likely reflects concerns that President-elect Donald Trump's policies, especially mass deportations, could breed inflation, making it harder for the Federal Reserve to cut interest rates next year.
"Strong immigration was one of the big things that made central banks (not just the Fed) much more relaxed about underlying price dynamics," Dario Perkins, managing director of global macro at TS Lombard, said in a Nov. 11 note to clients. "It helped to solve post-COVID labor shortages (not just in the U.S.). Sending millions of people back to their country of origin would reverse those trends and – depending on how many people were deported – recreate the situation we were in two years ago."