Exchange rate battles intensify: How will short-term fluctuations in the US dollar affect the pricing of Bitcoin and other cryptocurrencies?

Recent global financial markets have experienced intense volatility. Driven by escalating geopolitical conflicts in the Middle East, the US Dollar Index (DXY) briefly weakened before quickly regaining strength, posting its best weekly performance since November 2024. Meanwhile, market focus has shifted to the U.S. February non-farm payrolls report, scheduled for release at 21:30 Beijing time on March 6. Ahead of the data release, currency markets have seen heightened speculation, as investors attempt to gauge whether the labor market’s true condition can provide clues about the Federal Reserve’s future policy path. As a key variable in risk asset pricing, the fluctuating dollar has attracted close attention from the crypto market, with its transmission mechanisms and potential impacts warranting in-depth analysis.

Geopolitical and Macro Background Timeline

Phase 1: Brief Weakening of the Dollar and Rate Cut Expectations

Before the end of February 2026, the main trading logic centered on the timing and magnitude of the Fed’s rate cuts this year. At that time, due to policy uncertainties in Washington, the dollar index generally showed a soft trend. Market participants widely expected that if inflation continued to decline, the Fed might start cutting rates as early as mid-year.

Phase 2: Middle East Conflict Escalation as a Catalyst for Dollar Strength

In March, tensions in the Middle East suddenly intensified. Since the U.S. launched military strikes against Iran on February 28, geopolitical risks rapidly increased. Iran issued tough signals, even claiming to have hit a U.S. aircraft carrier, sparking widespread concerns about shipping disruptions through the Strait of Hormuz. In response, international oil prices surged sharply, with U.S. West Texas Intermediate (WTI) crude oil prices rising over 17% at one point. The rise in energy prices reignited inflation fears, causing market expectations for Fed rate cuts to cool off quickly. The dollar index then rebounded strongly, achieving its best weekly performance in over a year.

Phase 3: Heightened Market Play Before Non-Farm Payrolls

As of March 6, the day the U.S. February non-farm payrolls data is released, market expectations are that job growth will slow significantly to around 50,000, well below January’s 130,000. Options trading in the FX market shows that bullish sentiment on the dollar has risen to its highest level since June 2024. This indicates that, regardless of the actual non-farm data, the market has already priced in a strong dollar trend, with the core debate focusing on whether the data can sustain this momentum.

Data and Structural Analysis: Transmission Chain of the Dollar, Interest Rates, and Risk Assets

The dollar’s rally is not an isolated event; it results from the confluence of multiple old and new factors, exerting structural pressure on risk assets.

Inflation Expectations and Interest Rate Pricing Linkage

Rising oil prices due to Middle East tensions have directly increased inflation expectations. According to CME’s FedWatch Tool, the probability of the Fed holding rates steady at the next three meetings has increased from about 50% before the conflict to nearly 70%. Expectations for the first rate cut in 2025 have been pushed back from July to around October. This re-pricing reflects a shift away from the previously anticipated “liquidity easing” supporting risk assets.

Dollar’s Attractive Yield Effect

Historical data shows that periods of dollar strength often coincide with outflows from risk assets. LifeGoal Wealth Advisors noted that the dollar surged about 2% in just two trading days this week—an “exceptional move” indicating a rigid demand for dollar liquidity. In such an environment, funds tend to withdraw from equities, commodities, and crypto assets, moving into cash or U.S. Treasuries to hedge against uncertainty.

Micro Performance in Crypto Markets

From the crypto market’s own data, macro pressures have already transmitted to prices. Bitcoin briefly fell below $71,000 on March 5, with nearly $300 million in total liquidation within 24 hours, and open interest in futures contracts decreased by over 5%, indicating leveraged positions are accelerating exit. Although Bitcoin previously showed rare synchronized strength with the dollar index, the impact of heightened geopolitical risks appears to have shifted its “risk asset” nature back to the forefront.

Sentiment Analysis

Current market views on the relationship between the dollar and crypto assets are divided into two main camps:

Mainstream View: Strong Dollar Suppresses Risk Assets

Most traditional finance strategists believe that a strengthening dollar will directly suppress risk asset prices. TD Securities FX strategists point out that unless non-farm payrolls are extremely weak with a significant rise in unemployment, the market will find it difficult to reconsider this year’s rate cut outlook. Pepperstone senior strategist Michael Brown emphasizes that, until geopolitical tensions and inflation fears subside, any rebound in crypto markets is more likely to be choppy rather than a clear trend.

Alternative Perspective: Structural Changes in Macro Indicators

Some analysts have noted that since Trump’s 2024 election victory and his pro-crypto policies, Bitcoin and the dollar index have often moved in tandem, seemingly diverging from the traditional negative correlation. Some believe this indicates that crypto assets are gradually evolving from purely “anti-fiat” assets into macro assets driven by U.S. domestic policies. The rebound in Coinbase’s premium index is also seen as a sign of increased demand from U.S. investors.

Narrative Authenticity and Critical Examination

It’s important to distinguish between facts and speculation in market narratives.

Facts:

• The dollar index has indeed surged significantly this week, closely correlating with escalated Middle East tensions and oil price spikes.
• Expectations for Fed rate cuts have been delayed, as reflected in futures markets.
• Bitcoin experienced a notable correction amid dollar strength, with open interest declining.

Speculations:

• Whether the “synchronization” of Bitcoin and the dollar has become a norm remains to be confirmed with more data. The recent correlation may be a short-term phenomenon driven by geopolitical factors.
• The idea that “non-farm payrolls determine crypto market direction” oversimplifies the actual transmission process. The impact involves multiple steps: non-farm data → Fed expectations → dollar index → global liquidity → risk appetite → crypto markets, with many potential buffers and attenuations.

Industry Impact Analysis

The resurgence of the dollar’s strength impacts the crypto industry in two dimensions:

Short-term Trading: Increased Volatility and Leverage Liquidations

Before and after the non-farm data release, the sharp fluctuations in the dollar index will transmit to Bitcoin and other major cryptos. Strong data could further strengthen the dollar, exerting short-term downward pressure; weak data might allow a relief rally. However, high volatility environments tend to trigger repeated leverage liquidations, with open interest likely to continue shrinking.

Medium to Long-term Structural: Elevated Role of Macro Factors

This cycle’s linkage between the dollar and geopolitical risks further reinforces the “macro asset” nature of crypto markets. Historically, crypto was often viewed as isolated from traditional finance. Recent trends suggest that Fed rate expectations, dollar liquidity, and geopolitical risks have become fundamental drivers of crypto prices. This implies that future crypto valuation will be more closely tied to U.S. stocks, especially high-growth tech stocks. Industry participants should be cautious about relying solely on on-chain analysis, as macro factors increasingly influence market direction.

Multi-Scenario Evolution

Based on non-farm data and geopolitical developments, three potential scenarios can be outlined:

Scenario 1: Strong Non-Farm Data, Ongoing Geopolitical Risks

If February non-farm payrolls exceed expectations (e.g., around 70,000 or more), and Middle East tensions persist, the Fed’s rate cut expectations will be further delayed. The dollar index could stabilize above 99.50 or even challenge 100. In this case, risk assets would generally come under pressure, with Bitcoin potentially testing support around $70,000 or even revisiting previous lows.

Scenario 2: Weak Non-Farm Data, Eased Geopolitical Tensions

If non-farm payrolls fall significantly below expectations (e.g., below 30,000), and diplomatic efforts or ceasefires emerge in the Middle East, markets may quickly reprice for two rate cuts this year. The dollar could fall back toward 98, and Bitcoin might rally to attempt breaking resistance around $74,000.

Scenario 3: Mixed Data and News, Market in Consolidation

If non-farm data and expectations are close, and geopolitical tensions remain stalemated (neither escalation nor de-escalation), markets could enter a wide-range consolidation with no clear direction. Funds might flow from major assets like Bitcoin into altcoins with independent narratives, but overall profitability could decline.

Conclusion

The dollar index’s rebound driven by geopolitical conflicts and monetary policy expectations is challenging the global risk asset pricing system. For crypto markets, macro factors’ importance has become irreversible; non-farm data is no longer an isolated economic indicator but a key piece in assessing Fed policy paths. Before the data is released, any one-sided bets carry high risks. Investors should carefully distinguish facts from opinions and rationally analyze the transmission chain among the dollar, interest rates, and crypto assets. Market sentiment adjustments are rarely linear and depend on how inflation, employment, and geopolitical constraints evolve.