The Dollar Weakness Paradox: BofA's Extreme Bets Hide Hidden Risk Signals for Bitcoin

Bank of America (BofA)'s latest survey reveals a paradox in the financial markets. At this very moment, when investors are betting most aggressively on a weakening dollar over the past decade, Bitcoin is not gaining the expected bullish momentum from that bet. Instead, an unusual phenomenon is occurring where Bitcoin declines alongside the dollar’s weakness. This signals a break in Bitcoin’s ‘legendary rule’ established last year.

Worst Dollar Weakness in History, Causes

According to BofA’s mid-February fund manager survey, investor positioning on the US dollar has fallen to its weakest level since early 2012. It marked the lowest underweight stance based on net exposure. The background for this extreme dollar-weakness bet is a pessimistic outlook on the US labor market. Investors expect US economic indicators to continue deteriorating, which they believe increases the likelihood of the Federal Reserve cutting interest rates. Historically, rate cuts tend to reduce the dollar’s relative attractiveness, leading to the current extreme dollar-weakness positioning.

Bitcoin’s ‘Old Rule’: Could Dollar Weakness No Longer Be a Savior?

Looking back, Bitcoin has generally moved inversely to the dollar index (DXY) since its inception. When the dollar is weak, Bitcoin tends to rise; when the dollar is strong, Bitcoin tends to fall. This pattern can be explained by two reasons. First, since Bitcoin is dollar-denominated, a decline in dollar value increases Bitcoin’s relative purchasing power. Second, a strong dollar creates financial conditions that weaken risk assets like Bitcoin globally, while dollar weakness fosters an environment favorable to risk assets.

However, since early 2025, the situation has changed. An unprecedented positive correlation has formed between Bitcoin and the dollar index. According to TradingView data, the 90-day correlation coefficient reached 0.60—its highest since April 2025. This is significant. Despite the dollar index plunging over 9% last year and dropping another 1% this year, Bitcoin has fallen 6% in 2025 and is down 21% since the start of the year. A completely contrarian movement is unfolding.

Increased Volatility and Hidden Traps in Short Squeeze

If this new correlation persists, the traditional investor’s dollar-weakness bets could turn from positive signals into negative ones for Bitcoin. But there is another risk: when investors are overly positioned in extreme dollar-weakness bets, an unexpected dollar rebound could trigger a short squeeze. Investors holding short positions in response to a rapid dollar rally may all rush to cut losses and buy back, causing a sudden surge in asset prices and dramatically increasing volatility.

Eamonn Sheridan, Chief Currency Analyst for Asia-Pacific at InvestingLive, commented, “Record-breaking short positioning in major USD currency pairs increases volatility risk. While weak US economic data could prolong the downside, overly crowded short trades could also trigger a rapid short-covering rally.” In other words, excessive dollar-weakness bets themselves could become a volatility bomb.

Near-term Bitcoin Scenarios Depend on Oil and Middle East Tensions

As of the reporting date, the dollar index stood at 97.13 (up 0.25%), and Bitcoin was trading around $70,460 (up 3.65% in 24 hours). After former US President Donald Trump announced a five-day halt on attacks against Iran’s energy infrastructure, Bitcoin surpassed $70,000 and maintained its upward trend. Major altcoins like Ethereum, Solana, and Dogecoin also rose about 5%, showing broad strength, along with crypto mining stocks, which, along with the S&P 500 and Nasdaq (each up about 1.2%), remained bullish.

Experts say Bitcoin’s next move depends on oil prices and the stability of shipping through the Strait of Hormuz. In an optimistic scenario, Bitcoin could test the $74,000–$76,000 range, but in a worse scenario, prices could fall back into the mid-$60,000s. Ultimately, in this geopolitically and macroeconomically complex environment, Bitcoin’s future will be heavily influenced by the unfolding dollar-weakness bets and the risk of short squeezes.