If there is one aspect that both cryptocurrency and traditional markets ardently favor, it is the availability of inexpensive fiat liquidity. It is highly probable that the United States Federal Reserve, acknowledged as the most influential central bank worldwide, will undertake measures in that direction during the forthcoming year.
Based on research conducted by Deutsche Bank, market participants are anticipating the Federal Reserve to display the most accommodative stance compared to other advanced nation central banks by 2024. This projection suggests that interest rates may witness a decline of at least 100 basis points, equivalent to a 1 percentage point reduction, resulting in a shift from the current range of 5.25% to 5.5%. Such a move is expected to diminish the attractiveness of the U.S. dollar as an asset that offers relatively higher yields.
Additionally, ING indicates that the U.S. economy and inflation rate are projected to decelerate in the coming year. This economic slowdown would provide the Federal Reserve with the opportunity to pursue a more lenient monetary policy.
According to Bank of America’s World at Glance report on November 19, a shift in the tide is anticipated for the U.S. dollar as “it can start to adjust broadly lower towards equilibrium” in the upcoming year.
Bank of America’s strategists explained that while they still foresee the U.S. economy performing relatively well compared to other major economies next year, the possibility of an eventual economic slowdown and the consequent easing measures by the Federal Reserve, even in conjunction with easing by other central banks, is expected to provide widespread relief to currencies worldwide.
A devaluation of the U.S. dollar often acts as a favorable factor for risk assets, including bitcoin, as observed in the latter half of 2020 and early 2021. As a global reserve currency, the strength of the dollar significantly influences global trade and non-bank borrowing. When the dollar strengthens, it leads to financial tightening globally, discouraging risk-taking. Conversely, when the dollar weakens, the opposite effect is observed.
The provided chart indicates that most advanced nation central banks, with the Federal Reserve leading the way, are projected to reduce interest rates next year. This comes after a period of rapid rate hikes over the past 18-20 months to control inflation.
The coordinated easing measures could offset potential rate hikes by the Bank of Japan, which has been identified as a significant source of uncertainty for both cryptocurrency and traditional markets. Despite the Japanese central bank gradually moving away from its ultra-loose monetary policy this year, its benchmark rate remains below zero.
It is important to note that heightened expectations for easing leave room for potential disappointment and the possibility of a substantial rally in the U.S. dollar if inflation rebounds.