YEREVAN (CoinChapter.com) — In an alarming development, the Goldman Sachs Group has predicted that the US Dollar may weaken in the coming weeks. The projection comes in anticipation of upcoming Federal Reserve rate cuts. The development is a bullish sign for Bitcoin (BTC) and the wider crypto markets, which will surely gain from the weakened greenback.
The FED’s clear sign that rate cuts are on the horizon has impacted the prevailing outlook on the dollar in the markets.
Goldman Sachs updates Dollar Exchange rate projections
According to a recent Bloomberg report, the forecasts of Goldman Sachs’s exchange rate come following the Federal Reserve’s meeting last week. The Jerome Powell-led Federal Open Market Committee (FOMC) indicated that it plans to implement at least three rate cuts next year.
Moreover, the FOMC may implement four more cuts in 2025, marking a full percentage point. With three more reductions projected in 2026, the Fed funds rate could go down to between 2%-2.25%
During the last meeting, the Committee unanimously voted to keep the benchmark overnight borrowing rate between 5.25%-5.5%.
“Our new forecasts incorporate more dollar weakness than before. The biggest revisions to our forecasts are in the rate-sensitive currencies that would have struggled under a ‘higher for longer’ rates regime, such as the yen, the Swedish krona and the Indonesian rupiah,”
the bank’s analysts wrote in a report.
However, the bank had initially anticipated only a “shallow” dollar depreciation. Their 2024 currency outlook published in November projected a 3% drop over the next 12 months.
Following the Fed meeting, the US tumbled over 1% against the Euro, with losses continuing this week, according to Google Finance charts.
The greenback also lost against other major currencies, like the British Pound sterling, the Swiss Franc, and the Chinese Yuan.
Several hedge funds also predict the US Dollar’s future
These expectations of a weaker dollar in 2024 coming from Goldman Sachs are unsurprising. Most analysts surveyed by Bloomberg across the Group-of-10 nations and emerging markets also share this view.
Ahead of the Federal Reserve meeting last week, several hedge funds and market watchers had already shifted to a net short position against the US Dollar. This is the first time since September that the markets have turned bearish on the greenback.
In reaction to the Fed meeting, the Bloomberg Dollar Spot Index, which tracks the performance of the US dollar against a basket of major currencies, also dropped 1.2% last week, hitting a four-month low.
Why are markets bearing on the US dollar? Typically, reduced interest rates tend to lead to a weaker currency at home, having lost its attractiveness to yield-seeking investors.
As a result, investments denominated in the US dollar yield lower returns, causing an outflow of capital to higher-yielding currencies or assets. Moreover, Bitcoin (BTC) and the wider crypto sector, seen as an alternative to traditional investments, will also attract a part of the outflow.
Hence, Goldman Sachs has revised its exchange-rate forecasts, updating their expectations to currencies sensitive to rate changes. These include the Japanese yen, the Swedish krona, and the Indonesian rupiah. For example, the bank updated its forecast for the yen, projecting a relatively stable rate of 142 per dollar in the next six months. This is a massive improvement from its earlier estimate of 155.
What does a weaker US Dollar mean for Bitcoin?
A weaker US dollar could have several implications for Bitcoin (BTC) and altcoins.
Traditionally, as stated earlier, when the US dollar weakens, investors tend to look for an alternative store of value for their investments. During such times, cryptocurrencies like Bitcoin become a hedge against the sharp deviation of national currencies.
This inflow of capital into the sector leads to increased demand for cryptos. Moreover, BTC and altcoins are priced in US dollars. Hence, when the greenback’s value falls, the nominal price of cryptos increases, impacting its prices.
Following the recent rally, the leading crypto trades are currently at $41,380.
Moreover, a weakened US dollar will make international trade more expensive. In the long run, traders and governments will explore relying on cryptocurrencies for transactions to avoid risks.
Increased crypto investment and trade will also lead to aike in speculative trading, impacting the volatility in the market.
With the US dollar now set to lose some of its value, as Goldman Sachs predicts, Bitcoin may see a fresh rally in 2024.
