Bitcoin Rally Bets on Dollar Collapse! Will the "Shadow Chairman" of the Fed Keep the Trading Momentum Going?

Bitcoin investors are celebrating the price rebound to $93,000, but may be overlooking key “sequential” risks related to liquidity. Former White House economist Kevin Hassett is a top contender for Fed Chair, and his dovish stance could drive the dollar further lower. However, this expectation-driven trade may run out of steam before the official chair transition in May 2026.

The Dollar’s Nine-Day Slide and Bitcoin’s Inverse Dance

(Source: MacroMicro)

As Bitcoin has rebounded recently, the dollar has fallen for nine consecutive trading days. This inverse correlation is key to understanding Bitcoin’s current rally. The US Dollar Index (DXY) has dropped about 3% from its November high, while Bitcoin has climbed from the $84,000–$87,000 range to near $93,000. This precise inverse movement is no coincidence, but a direct reflection of liquidity mechanisms.

The dollar’s weakness is driven by rising expectations of Fed rate cuts. Futures markets now put the odds of a 25-basis-point cut this month in the mid-80% range, a shift that has eased financial conditions. When the market expects the Fed to cut rates, the dollar becomes less attractive as interest income from holding dollars declines. As a result, capital flows from the dollar into other assets, including stocks, gold, and Bitcoin.

The 10-year US Treasury yield has held around 4.1%, a backdrop historically consistent with risk-on sentiment in crypto markets. When long-term rates are stable and no longer rising, it signals that the market is no longer concerned about runaway inflation or the Fed being forced to tighten further. This stable rate environment gives risk assets some breathing room.

This has helped Bitcoin rebound from recent lows after a volatile November, during which leveraged crypto products and proxy stocks saw dramatic price swings. November’s correction was mostly driven by a stronger dollar and rising long-term rates; when both factors reversed in December, Bitcoin bounced back naturally. Midweek this week, spot prices hovered around $92,300, having technically broken out of the downward channel formed in November, opening space for further gains.

Three Key Mechanisms Behind the Dollar-Bitcoin Inverse Correlation

Liquidity Substitution: When the dollar weakens, capital flows to other stores of value like Bitcoin

Purchasing Power Parity: Dollar depreciation boosts Bitcoin purchasing power for non-USD investors

Risk Appetite Indicator: Dollar weakness usually comes with loose monetary policy, enhancing risk asset appeal

This inverse relationship is clearly visible in 2023–2025 data. In months when the dollar index falls more than 2%, Bitcoin rises an average of about 15%. Conversely, in months when the dollar index rises over 2%, Bitcoin usually faces downward pressure. This statistical pattern provides an important macro hedging framework for short-term traders.

The Policy Spectrum of the Top Five Candidates and the Dollar’s Fate

(Source: Polymarket)

Speculation over the Fed’s “shadow chair” has added a new catalyst. According to Reuters, President Trump plans to nominate the next Fed Chair in early 2026, as Powell’s term ends May 15, 2026. Prediction market Polymarket currently prices in Hassett as the favorite, with traders believing his policy path next year may be more dovish.

Kevin Hassett recently claimed in interviews that inflation has “fallen sharply” and urged faster rate cuts. Investors believe that if the Fed leadership adopts this stance, it could mean a dovish tilt and put pressure on the dollar. As a former White House economist and ex-Coinbase advisor, Hassett’s policy leanings clearly favor stimulating economic growth, even at the cost of slightly higher inflation. For Bitcoin, this dovish scenario is the most favorable.

Current Governor Christopher Waller has recently advocated for spending cuts in December, while stating that decisions depend on data. Waller’s stance is relatively neutral: neither strongly dovish nor hawkish. His emphasis on data dependency means policy will be flexibly adjusted based on inflation and employment data, making this gradualism predictable for the market.

Vice Chair for Supervision Michelle Bowman tends to take a gradualist approach from a financial stability perspective. Bowman’s top priority is preventing systemic financial risk, meaning she is likely to avoid aggressive policy shifts, either sharp rate cuts or rapid hikes.

Kevin Warsh, a former governor, has long criticized the Fed’s balance sheet expansion, so he’s seen as tougher on inflation and the pace of capital outflows. Warsh advocates for a faster reduction of the Fed’s balance sheet, reducing liquidity injections into the market. This hawkish stance is positive for the dollar but negative for Bitcoin.

BlackRock’s Rick Rieder emphasizes the importance of market mechanisms and, given housing market tensions, strongly supports spending cuts. With a background in fixed income, Rieder understands bond market dynamics, which may make him focus more on long-term rates and managing market expectations when setting policy.

The Time Paradox of the Shadow Chair Effect and Trading Risks

For Bitcoin, sequence and timing are critical, as the effects before mid-2026 are driven by expectations and financial conditions, not by actual near-term policy changes. Trump’s plan to announce a nominee in “early 2026” means there will be months of hearings and Senate power struggles before a final pick is confirmed. Until then, Powell and the current committee will continue to steer policy.

Therefore, the real impact on Bitcoin is the “shadow chair effect”: the market adjusts the yield curve and the dollar exchange rate based on perceived preferences of the presumed successor, and crypto trades reflect those changes. The danger of this effect is that the market may overtrade an uncertain future. If Hassett ultimately is not nominated, or if the Senate rejects his confirmation, all dollar short and Bitcoin long positions based on the “Hassett-dovish” assumption could face sharp reversals.

After November’s outflows, a sustained acceleration in net inflows will validate the rebound and absorb supply from profit-taking miners. Position adjustments have also played a role: after Bitcoin prices fell in November, US spot Bitcoin ETFs saw heavy redemptions, but with short covering and dollar weakness, Bitcoin rebounded quickly. November’s large outflows, along with record single-day outflows at the beginning of the month, left room for a mechanical rebound once macro pressures eased.

If the odds of a December rate cut continue to rise in policy statements and forecasts, a weaker dollar and easier financial conditions will provide further tailwinds. Conversely, a surprise hawkish policy shift or inflation shock would boost the dollar, push yields higher, and pressure risk assets including crypto.