Bitcoin Slips Below $118K as U.S. GDP Surprise Lifts Dollar to 5-Week High

Bitcoin (BTC) traded cautiously just below $118,000 on Tuesday after stronger-than-expected U.S. economic data drove the dollar index (DXY) to a five-week high, raising concerns about a potential squeeze on crowded USD short positions.

The DXY, which measures the greenback’s performance against a basket of major currencies, climbed to 99.34—its highest level since June 23—according to TradingView data. The move was fueled by second-quarter U.S. GDP figures showing the economy grew at an annualized rate of 3%, outpacing expectations.

The GDP boost came largely from a sharp drop in imports, while consumer spending rebounded to 1.4%, up from 0.5% in Q1—indicating a recovery in domestic demand. The gross domestic purchases price index, a key inflation gauge, eased to 1.9% from 3.4% in the previous quarter.

The stronger economic data likely cemented expectations that the Federal Reserve will leave interest rates unchanged at its policy meeting later on Wednesday.

The dollar’s recent stabilization marks a pause in the sharp downtrend that began after January, when the DXY traded above 110. Now, market participants are warning that a continued rebound could trigger a short squeeze, adding pressure to risk assets, including equities, emerging markets, and crypto.

“We see near-term risks from overcrowded short positions in the dollar,” said the Market Insights team at Singapore-based QCP Capital. “The dominant 2025 narrative has centered around dollar weakness, driven by the Tariff War, but with the DXY already down 10% year-to-date, further downside may be limited.”

QCP also highlighted extreme short positioning in USD/JPY futures, noting that the trade is not only widely held but also expensive to maintain. “The setup is vulnerable to a dollar squeeze that could unwind risk-on trades across asset classes,” the firm warned.