Strategists at State Street, one of the world’s largest asset managers, say the US dollar’s worst run in nearly a decade could deepen if the Federal Reserve eases policy more aggressively than markets expect, which is a distinct possibility following a possible leadership change at the central bank.
Speaking at a conference in Miami, State Street strategist Lee Ferridge said the dollar could decline by as much as 10% this year if financial conditions loosen further. While he described two rate cuts as a “reasonable base case,” he warned that the risks are skewed toward more reductions. “Three is possible,” Ferridge said.
Source: Walter Bloomberg
Lower US interest rates tend to reduce the appeal of dollar-denominated assets, especially for foreign investors. As rate differentials narrow, overseas investors are more likely to increase currency hedging, which involves selling dollars to protect returns. That added hedging demand can amplify downward pressure on the currency.
Dollar weakness could also be tied to Kevin Warsh, US President Donald Trump’s pick to succeed Jerome Powell as Fed chair. If confirmed, Warsh is widely expected to favor a more aggressive pace of rate cuts.
With the central bank’s current target rate range of 3.50%-3.75%, markets are currently aligned with the more cautious scenario. According to CME Group’s FedWatch Tool, investors are pricing in two rate cuts this year, with the first likely coming in June. Two policy meetings are scheduled before then.
June’s FOMC meeting is likely to see the first of two rate cuts this year. Source: CME FedWatch
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Weak dollar seen as catalyst for Bitcoin
A weaker US dollar has often coincided with stronger demand for risk assets, including Bitcoin (BTC) and other digital assets. Analysts frequently point to an inverse relationship between the US Dollar Index and Bitcoin, where periods of dollar softness tend to create a more favorable backdrop for crypto prices.
The US Dollar Index recently touched a four-year low. Source: Bloomberg
A falling dollar can ease financial conditions, boost global liquidity and push investors toward assets seen as alternatives to fiat currencies. That dynamic has helped support Bitcoin during several past dollar downturns.
Still, the relationship is far from automatic. Recent analysis suggests Bitcoin’s short-term performance has not consistently tracked dollar weakness, and in some periods, prices have even fallen alongside declines in the greenback.
Profit-taking, investor positioning, broader risk sentiment and uncertainty around monetary policy can all dampen the impact of currency moves.
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