The US Dollar Index (DXY) has fallen to its lowest level in four years, following comments from President Trump on 28 Jan describing the value of the currency as "great".
Over the past two weeks, the index has declined by more than 3.4%. Historically, moves of this magnitude in the dollar ripple through dollar-denominated assets, including Bitcoin, though the relationship is often misunderstood or overstated.
Understanding the dollar index
To clarify the context, it is helpful to define what the DXY represents. The index measures the value of the US dollar against a basket of major currencies, including the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc. A falling DXY indicates broad-based dollar weakness instead of a move against any single currency.
The relationship between the US dollar and Bitcoin is frequently reduced to a crude inverse rule of thumb: dollar down, Bitcoin up. While this framing is simplistic, it captures an important mechanical truth. Bitcoin is priced in US dollars. If the denominator in a price ratio weakens, the numerator rises. This relationship means that sharp changes in dollar conditions influence how Bitcoin is priced and perceived at the margin, regardless of whether moves in the dollar actually cause moves in Bitcoin.
Analysing the speed of decline
Rather than looking solely at the level of the dollar, Sandmark focuses on the speed and extremity of dollar moves. Specifically, we calculate the z-score of weekly, five-day changes in DXY to identify extreme downside regimes, defined as readings at or below minus two standard deviations. We then measure Bitcoin performance after those regimes end, once the z-score recovers above that threshold.
Chart
Since 2024, the results show a clear pattern across time horizons. Short-term outcomes remain mixed. Seven-day returns following regime exits are evenly split between gains and losses, while 30-day returns are more frequently positive but still volatile. There is no reliable short-term timing signal to be found here.
Asymmetric returns over time
The asymmetry appears over longer horizons. At the 90-day mark, every observed regime exit since 2024 has been followed by positive Bitcoin returns. The average gain over that window is roughly 43%, with outcomes ranging from low single-digit gains to advances exceeding 80%. While the sample size is small and should be treated cautiously, the consistency stands out relative to shorter horizons.
The key takeaway is a probabilistic one. Extreme dollar weakness appears to coincide with favourable medium-term outcomes once conditions normalise, even if it fails to trigger immediate Bitcoin rallies. If historical patterns persist, the recent decline in DXY suggests the coming quarter could skew positively for Bitcoin. This should be viewed as a probabilistic tailwind rather than a short-term signal.
