A gloomy outlook for the US dollar is leaving Bitcoin with a potential to continue its bull run towards $20,000.
The greenback’s sell-off accelerated this week as its value against foreign currencies fell by another 0.21 percent in overnight trading. The US Dollar Index (DXY) reached 90.22 on Thursday, its lowest level since April 2018, which prompted Morgan Stanley to predict further declines for the trade-weighted instrument.
Mark Wilson, the chief investment officer and chief US equity strategist for Morgan Stanley, told Bloomberg that he sees the US dollar crashing by another 10 percent within the next twelve months. The analyst noted that the Federal Reserve and the US government has been “the most aggressive with structural deficits” amid the coronavirus pandemic.
“A weaker dollar is helpful for the world,” he added. “A stronger one is more of a constriction on global growth […] It is ultimately a positive story for reflation.”
Analysts at JP Morgan & Chase Co. also believed in a bearish US dollar outlook for 2021. The bank’s lead portfolio manager in Asia rates and forex, Julio Calegari, said that China’s post-pandemic growth reduced the greenback’s investment appeal.
The statements appeared as Bitcoin continued to tower near its recently established all-time high of $19,915. That brought its year-to-date profits up by 179 percent as of this Tuesday. The BTC/USD exchange rate was up 5.61 percent on a weekly timeframe, a complete opposite of how the US dollar index performed.
Both BTC/USD and DXY has shown an inverse correlation this year, especially after the mid-March global market rout. In the month, the Bitcoin price crashed by almost 60 percent in just two days. On the other hand, the dollar showed strength and jumped by 8 percent around the same period.
They moved opposite because investors sought cash safety against an uncertain economic outlook led by the fast-spreading COVID-19 pandemic. As governments announced lockdowns, the stock market crashed. That led people to unload their profitable positions elsewhere to raise dollars.
Nevertheless, a large scale intervention by the Federal Reserve and the US government eased cash demand. They together committed to injecting about $3 trillion worth of liquidity via unlimited bond purchasing and by deciding to expand their fiscal deficit. As a result, the dollar fell, and Bitcoin — thanks to its safe-haven narrative — rallied higher.
The dynamics haven’t changed for the year 2021. The US economy is experiencing a rapid increase in its COVID-19 infection rates. Meanwhile, a bipartisan bill proposes to inject about $908 billion into the US economy, furthering widening the deficit.
In its latest minutes, the Federal Reserve has confirmed that it would keep the bond-buying pace intact amid a lower interest rate environment. Meanwhile, investors have increased their bets that the bank would now start buying longer-dated US Treasury notes because the yields on the short-term ones are already near zero.
Overall, the scenario makes Bitcoin a stronger investment alternative to the US dollar and bonds. That explains why the cryptocurrency could breakout above $20,000 in the coming quarterly sessions.