TLDR:
- Dollar Index has weakened over six weeks, creating liquidity-positive conditions for Bitcoin and equities.
- Federal Reserve begins balance sheet expansion through Treasury purchases for first time since 2022.
- Net Fed Liquidity rising after late 2025 decline, expected to continue moderately higher through 2026.
- Increasing Fed rate cut expectations could accelerate dollar weakness as other central banks slow easing.
The Dollar Index has weakened over the past six weeks, creating favorable conditions for risk assets including cryptocurrencies and equities.
This development comes as the Federal Reserve begins expanding its balance sheet through Treasury bill purchases, marking the first expansion since 2022.
Market observers view the dollar’s decline as liquidity-positive, potentially benefiting Bitcoin and traditional risk assets throughout 2026.
Dollar Decline Creates Liquidity Tailwind
The weakening dollar has reversed months of pressure on risk assets. According to Milk Road Macro’s analysis, the Dollar Index rate of change shows strong correlation with S&P 500 and Bitcoin performance.
A strengthening dollar previously acted as a drag on prices through late 2025 by tightening financial conditions domestically and reducing global liquidity.
The relationship between dollar strength and asset prices operates through multiple channels. When the dollar strengthens, it removes liquidity from global markets and makes dollar-denominated assets more expensive for international investors. Conversely, dollar weakness injects liquidity into the system and reduces financial stress.
Current market positioning suggests the dollar could face additional downward pressure. The Federal Reserve’s recent balance sheet expansion adds a new bearish factor to the currency’s outlook.
While these Reserve Management Purchases differ from traditional quantitative easing, they still inject liquidity into financial markets.
Federal Reserve Policy Shift Could Accelerate Trend
The Federal Reserve’s Net Liquidity metric has begun rising after dropping sharply in late 2025. This measure tracks all liquidity-altering components of the central bank’s operations.
Reserve Management Purchases will continue driving this metric moderately higher throughout 2026, creating ongoing pressure on the dollar.
Market expectations for Federal Reserve rate cuts represent another potential catalyst for dollar weakness. Current projections anticipate two to three rate cuts during 2026.
However, if these expectations increase while other central banks slow their easing cycles or maintain rates, the dollar could see meaningful declines.
The divergence in global monetary policy creates important dynamics for currency markets. Many international central banks are projected to reduce the pace of rate cuts or potentially reverse course with rate increases.
This policy gap would make dollar-denominated assets relatively less attractive and accelerate the currency’s decline.
The combination of expanding Federal Reserve liquidity and potential rate cuts establishes a bearish foundation for the dollar.
Market participants monitoring these developments can position accordingly, as sustained dollar weakness typically provides sustained support for risk assets across equity and cryptocurrency markets.
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Source: https://blockonomi.com/dollar-index-weakness-and-fed-balance-sheet-expansion-signal-better-conditions-for-bitcoin-and-risk-assets/
