Dollar Recovery Gains Traction, but Analysts Urge Caution on Long-Term Outlook

Dollar Rebounds Amid Strong U.S. Data and Japan Uncertainty — Bitcoin Faces Headwinds

The U.S. dollar is showing signs of life after a prolonged downturn, rebounding sharply in recent days — a move that could spell trouble for bitcoin and broader risk assets if sustained. Still, analysts warn the greenback’s comeback may be short-lived.

The U.S. Dollar Index (DXY) has risen 1.4% to 98.30, bouncing from a multi-year low of 96.37. This marks a technical breakout above a key descending trendline from February’s peak, suggesting a short-term bullish shift.

“The dollar’s back-to-back weekly gains are driven by stronger-than-expected economic data and a rise in U.S. yields,” said Marc Chandler, Chief Market Strategist at Bannockburn Global Forex. “But this is more likely a corrective move than a sustained reversal.”

Historically, a stronger dollar has weighed on bitcoin (BTC) and other risk-on assets, as it tightens financial conditions and dampens investor appetite for speculation.

Fed Policy and Japan Election Fuel Dollar Strength

A key driver behind the recent bounce is the shifting outlook on Federal Reserve policy. Markets have pared back expectations for interest rate cuts, with the implied year-end Fed funds rate rising by nearly 25 basis points this month.

Analysts at ING highlighted that upbeat U.S. retail sales and jobless claims data are supporting a more hawkish view of the Fed’s trajectory.

“We expect the 14 basis points of easing still priced in for September to be fully unwound,” ING said. “That could put additional pressure on the euro and lift USD/JPY even further — especially with political uncertainty in Japan.”

Focus on Japan’s Upper House Election

The upcoming Upper House election in Japan, scheduled for Sunday, is also weighing heavily on markets. Investors fear the ruling coalition — comprised of the Liberal Democratic Party and Komeito — could fail to secure a majority, leading to political instability.

Ahead of the vote, Japanese leaders have promised tax cuts and direct cash handouts, raising concerns over the country’s already fragile fiscal position. Meanwhile, speculation is growing that the Bank of Japan may hike rates sooner than expected.

“The coalition needs at least 50 of the 125 contested seats to maintain a majority,” ING noted. “A weaker outcome could trigger further outflows from Japanese assets and lift the dollar.”

Long-Term Dollar Strength Remains in Doubt

Despite the rebound, some market observers remain skeptical about the dollar’s ability to maintain its gains.

“The U.S. economy hasn’t improved in any fundamental way,” said Griffin Ardern, Head of Options Trading and Research at BloFin. “Inflation has ticked up again, and the recent passage of the OBBBA bill only adds to concerns.”

The One Big Beautiful Bill (OBBBA) — a large-scale fiscal spending package recently signed into law — is expected to widen the U.S. deficit by $3 trillion over the next several years, raising long-term inflation risks.

“As Japan’s political outlook stabilizes, the dollar will likely lose momentum,” Ardern added.

Bitcoin’s Correlation with the Dollar Back in Focus

With the dollar climbing, attention is turning back to its historically inverse relationship with bitcoin. Should the greenback continue to strengthen, BTC could face renewed resistance after its recent gains.

For now, however, most analysts view the dollar’s resurgence as a technical bounce — not the start of a long-term trend reversal.