Bitcoin (BTC) last traded at $21,268.25, up 10% after falling below $19,000 earlier this week and its lowest level since mid-June. Other digital currencies also rose slightly. The total cryptocurrency market cap has risen to over $1 trillion again.

The latest surge for Bitcoin was triggered by a slight weakening of the US dollar, which has seen a dramatic rally this year. The US dollar index, which measures the dollar's value against a basket of other currencies, fell nearly 1% on Friday morning. U.S. stock indices closed higher on Thursday and futures rose on Friday. Bitcoin is often closely associated with emerging US markets when stock indices rise. Bitcoin also tends to rise when the dollar weakens.

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Bitcoin has been trading around $18,000 to $24,000 since June and has failed to break this pattern. Vijay Ayyar, vice president of institutional development and international at crypto exchange Luno, said Friday's rally could be a "bearish test" of $22,500 to $23,000.

   "So I think this is a more volatile bearish rally, unless we break that level convincingly and close above."

Bitcoin has been battered this year, falling more than 60% from the record high seen in November as the Federal Reserve aggressively raised interest rates, taking the glare of risky assets like cryptocurrencies. The crypto market has also been hit by failed projects and high-profile bankruptcies that have spread to the industry.

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Crypto markets are anticipating a major network upgrade to Ethereum, called consolidation, which proponents say will make the blockchain more efficient. The merger is expected to be completed by mid-September. At the start of the event, the price of Ether, the native token of Ethereum, far outstripped Bitcoin. Financial markets also expect inflation to cool when the US Consumer Price Index is released next week. Investors are also following signals about the Fed's rate hike path.

On Thursday, Fed Chairman Jerome Powell said he was "strongly committed" to fighting inflation and suggested that more rate hikes could come. Yuya Hasegawa, a crypto market analyst at Japanese crypto exchange Bitbank, said that in anticipation of cooling inflation and an Ethereum consolidation, Bitcoin could test the $22,000 level, but also issued a warning. Hasegawa said in a note on Friday:

   "Too much optimism can be dangerous, given what some Fed members have said this week, including Chairman Powell."