In the realm of financial markets, both the cryptocurrency and traditional sectors share a deep appreciation for easily accessible fiat liquidity at reasonable costs. The imminent prospect of the U.S. Federal Reserve, recognized as the world’s foremost central bank, embracing measures to facilitate this kind of liquidity appears likely in the upcoming year.
Market observers project that the Fed will adopt an exceptionally accommodative stance compared to other advanced national central banks in 2024. Traders anticipate a reduction of at least 100 basis points, equivalent to a 1 percentage point decrease, from the prevailing interest rate range of 5.25% to 5.5%, as indicated by research from Deutsche Bank. This move is anticipated to diminish the attractiveness of the U.S. dollar as a relatively high-yielding asset.
According to insights from ING, expectations for a deceleration in the U.S. economy and inflation rates in the coming year pave the way for the Fed to pursue a more lenient monetary policy.
In a recent report, Bank of America asserted that a shift is underway for the U.S. dollar, signaling a potential broad adjustment to lower levels in the coming year. Despite predicting a relatively robust performance for the U.S. compared to other major economies, Bank of America strategists foresee the likelihood of an eventual economic slowdown and corresponding Fed easing, which could alleviate pressures on global currencies.
A weakened U.S. dollar typically acts as a favorable force for risk assets, including bitcoin. This dynamic was evident in the latter part of 2020 and early 2021. As a global reserve currency, the strength or weakness of the dollar significantly influences global trade and non-bank borrowing. Strengthening of the dollar leads to financial tightening on a global scale, discouraging risk-taking, while a weaker dollar has the opposite effect.
Examining the chart reveals that many advanced national central banks, led by the Federal Reserve, are anticipated to lower interest rates in the coming year, countering the trend of rapid increases in the past 18-20 months aimed at controlling inflation.
This coordinated easing strategy may serve as a counterbalance to potential rate hikes by the Bank of Japan, which has been a source of uncertainty for both cryptocurrency and traditional markets. Despite the Japanese central bank’s gradual departure from its ultra-easy monetary policy, its benchmark rate remains in negative territory.
It is crucial to note that heightened expectations for easing carry the risk of disappointment, and a substantial rally of the U.S. dollar could occur if inflation rebounds. Bank of America’s strategists identify various scenarios, including an unforeseen growth and inflation-driven rate shock from the U.S., a supply-driven surge in oil prices, and a contraction in growth emanating from China, as potential factors contributing to an upward shift in the value of the U.S. dollar.