The U.S. dollar has been in a sustained decline since 2025, continuing its slump into early 2026 and mirroring significant downturns in the crypto market. This persistent weakening of the dollar, coupled with growing expectations for Federal Reserve rate cuts, typically signals a bullish environment for risk assets like cryptocurrency. However, a deeper look reveals complex underlying factors that could turn these seemingly positive indicators into headwinds for crypto's future performance.
The Dollar's Persistent Slide and Rate Cut Expectations
The DXY, a key measure of the dollar's strength, has seen a notable depreciation, falling 9.4% in 2025 and an additional 1.4% early in 2026. This slide has historically coincided with instability in the crypto market, notably the 2022 crash. Concurrently, optimism is mounting for a March FOMC rate cut, driven by cooling inflation data and a dovish outlook from the new Fed Chair. Such a cut could further depress the dollar by an estimated 10%, a scenario that traditionally makes alternative investments more attractive as investors shift away from safe-haven assets.
Unforeseen Headwinds for Crypto's Rally
Despite the conventional wisdom that a falling dollar and lower interest rates boost risk assets, crypto's performance has diverged from this pattern. In 2025, instead of rallying, crypto mirrored the DXY's decline. This unusual correlation is attributed to escalating U.S. debt interest payments to overseas holders, which reached a record $292 billion in Q3 2025. This massive debt has fueled concerns about a potential liquidity squeeze within the financial system. As the U.S. faces increasing debt pressure and countries like China offload Treasuries, a forthcoming rate cut, while weakening the dollar, might paradoxically intensify liquidity concerns. This systemic stress suggests that what typically acts as a catalyst for crypto could, in the current environment, pose significant risks, potentially making rate cuts more bearish than bullish for the market's performance in the second half of the year.
