The weaker dollar is failing to spur bitcoin's BTC$88,336.23 usual rally, and J.P. Morgan Private Bank explains the unexpected behavior as a window into the nature of the U.S. currency's decline.

The Dollar Index (DXY), which measures the greenback against a basket of peers, has dropped 10% in the past year. Bitcoin, which historically gains during periods of dollar weakness, lost 13% in the same period, CoinDesk data show. The CoinDesk 20 index (CD20), a measure of the largest digital assets, fell 28%.

The difference this time is that the dollar is being driven by short-term flows and sentiment rather than a shift in growth or monetary policy expectations, with U.S. rate differentials still moving in the dollar’s favor, according to strategists at the bank.

"It’s crucial to note that the recent dollar slide isn’t about shifts in growth or monetary policy expectations," Yuxuan Tang, J.P. Morgan Private Bank's head of macro strategy in Asia, said in a note shared with CoinDesk.

"If anything, interest rate differentials have actually moved in the USD’s favor since the start of the year. What we’re seeing now, much like last April, is a USD selloff driven primarily by flows and sentiment," Tang continued.

The bank's view is that the weakness will, ultimately, prove temporary, like last year, and that the dollar will eventually stabilize as the world's largest economy picks up steam throughout the year.

That helps explain why bitcoin has failed to behave like a classic dollar hedge. While gold and other hard assets have rallied as the greenback fell, BTC has remained range-bound, suggesting the crypto market do not see the dollar's slide as a durable macro shift.

As a result, bitcoin is still trading more like a liquidity-sensitive risk asset than a default store-of-value trade. Without a clear shift in monetary policy expectations, dollar weakness alone has proven insufficient to pull new capital into crypto markets.

J.P. Morgan Private Bank’s framework also points investors toward assets such as gold and emerging-market exposure as more direct beneficiaries of dollar diversification, rather than bitcoin.

Until growth or rate dynamics take over from flows and sentiment as the primary driver of currency markets, the largest cryptocurrency may continue to lag behind traditional macro hedges, even if the dollar remains soft.

UPDATE (Jan. 29, 09:51 UTC): Removes JPMorgan from headline.