The falling dollar gives cryptocurrencies an exciting opportunity to grow
The US dollar continues to weaken and has already reached its lowest level in two and a half years. Bets on its further weakening are record-breaking and its decline gives room for growth for some assets that we would previously not expected at all. At this point, developments on the dollar are most in favor of the euro, but cryptocurrencies might be the ones who will end up victorious. The weakening of the dollar is not about to stop, and its losses are likely to deepen even more next year.
The dollar reached a 2,5-year low
US stock indices kicked off the new month by rising to record highs, and generally positive sentiment was supported by news of the resumption of negotiations on the US fiscal package. However, progress over the covid-19 vaccine in recent weeks has been high, convincing investors that it is the right time to slowly get rid of safe assets and start looking at returns in riskier waters. It was the desire of investors to start taking more risks to what the US dollar reacted doing it so by weakening to 2,5-year-old lows. However, the significant outflow of capital from the US dollar was also supported by bets on its weakening, which are now at a record pace.
Graph: Dollar weakening bets are record-breaking (Source: bloomberg.com)
A dream come true for cryptocurrencies?
The social, political, and macroeconomic consequences of the long-term weakening of the dollar can be very serious. In the short term, however, there is one group of people who rejoice from the weakening dollar: crypto traders. The improving outlook for the world economy, combined with strong signals from the Fed that it does not intend to raise interest rates in the near future, even if inflation exceeds the 2% target, puts the dollar under further pressure. The dollar did well this year only due to the background of growing uncertainty in the economy and financial markets. However, with the advent of the vaccine, the uncertainty is gone, and the fall in the dollar may accelerate once the more conservative investors realize that it is indeed the right time to take on riskier assets. Everything is supported by very low yields on US government bonds.
A weak dollar is a dream scenario for cryptocurrencies. These are a legitimate part of the foreign exchange market, which is expressed in US dollars, and when the dollar falls, others grow. At the same time, we see almost no prospects for a resumption of growth on the dollar. Food and housing prices are rising and American citizens are losing purchasing power. If the dollar continues to deteriorate, inflation will rise and the Fed has no plans to intervene. Over time, people may become more and more aware of this and will eventually be forced to turn to cryptocurrencies, similar to people in Venezuela, Turkey, or Iran. This is an extreme case, but many consumers will think that way.
Chart: EURUSD Weekly Chart (Source: Purple Trading cTrader)
Is it possible for USD to recover?
The US dollar benefits mainly from nervousness. The path to its recovery will be thorny and will require certain circumstances to play a role. Specifically, events such as Brexit or the EU debt crisis could drag on. In the first half of next year, however, an overall calm season is expected, which will lead to a subsequent weakening of the dollar. The currencies of emerging economies, which were under pressure during the pandemic, will also have their role to play.
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