Bitwise analyst cautions dollar strength could hinder bitcoin breakout, despite it nearing $100,000

While bitcoin's price has been on a tear recently, rising as close as it's ever been to the $100,000 milestone, one analyst claims the rising strength of the U.S. dollar could pose a challenge for further price growth.

"The appreciation of the dollar could limit bitcoin’s upside, as the historical performance of bitcoin tends to suffer during periods of dollar strength. Additionally, dollar appreciation often signals tighter global liquidity, which could be a headwind for bitcoin in the near term," Bitwise European Head of Research Europe André Dragosch told The Block.

"What is more is that our own quantitative models imply that the US Dollar is currently the most important macro factor with respect to the performance of Bitcoin and monetary policy as well as global growth expectations have become less important lately," Dragosch added.

The U.S. dollar index has climbed to 105.93, up from 103.42 on the day of the U.S. election, according to TradingView data .

Interest rate traders scale down rate cut expectations

However, regarding monetary policy, investors have recently lowered expectations for the pace of interest rate cuts by the U.S. Federal Reserve, which is a major factor supporting the dollar’s strength. The CME FedWatch tool is currently setting the probability of a 25 basis-point rate cut at 66%, with a 34% likelihood of rates remaining steady at the next Federal Open Market Committee (FOMC) meeting on December 18.

Another developing macroeconomic condition that could act as a source of sell pressure on bitcoin is anticipation the Bank of Japan will raise interest rates at the central bank's next policy meeting. Expectations of a hawkish move by the BoJ have already driven up yen strength versus the dollar.

The same sort of shift triggered an initial unwinding of the yen carry trade in early August, resulting in a major liquidation event in risk assets, including as sell off in bitcoin and the broader cryptocurrency market. The yen carry trade is a strategy where investors borrow low-interest-rate yen to invest in higher-yielding assets in other currencies, aiming to profit from the interest rate difference.

Data released on Friday revealed that consumer prices in Tokyo rose for the first time in three months, reinforcing the case for another interest rate hike by the BoJ in December. At a recent policy meeting, BoJ Governor Kazuo Ueda stated that Japan's economy is moving towards sustained, wage-driven inflation and cautioned against keeping borrowing costs too low, according to Reuters .