The US dollar is expected to continue its downward trend into 2021 as Democrats gain control of Congress.
Many observers agree that the dollar would do well in 2021, given its purported ability to manage inflation caused by the U.S. government’s expansionary fiscal stimulus for the people.
Meanwhile, Bitcoin Trader a cryptocurrency that trades inversely to the greenback, has reached new record highs above $40,000-more than double its December 2017 peak.
„It makes some sense to me,“ former Fed Governor Kevin Warsh tells CNBC of Bitcoin’s bull run. „The dollar is weakening, and after the election overnight, I would expect the dollar to continue to weaken against a large basket of currencies.“
The U.S. dollar is in a deeper downtrend in 2021. Source: DXY on TradingView.com
The narrative is as follows: Bitcoin comes with a predefined supply cap of 21 million, with supply decreasing by half after four years. Meanwhile, the US dollar has no defined supply cap.
The Federal Reserve can print it indefinitely, effectively reducing its purchasing power in the long run. Assets like Bitcoin tend to protect investors from fiat devaluation.
The Great Bitcoin Boom
In 2020, Bitcoin’s anti-dollar narrative picked up steam in institutional circles.
As the U.S. government increased spending to help people through the coronavirus pandemic and the Fed cut its benchmark interest rate to near zero, the dollar plummeted more than 12 percent from its high for the year. That prompted investors to buy Bitcoin (get in too? Go to Buy Bitcoins with Instant Bank Transfer Guide) to move their cash reserves, which ended the year up nearly 300 percent.
Bitcoin performance since its mid-March low.
The year 2021 offers similar prospects for both the dollar and bitcoin. Mr. Biden’s victory this week has mainstream analysts turning more bearish on the greenback.
The President-elect hopes to increase the $900 billion stimulus package, fueling expectations for further inflation.
A clean blue sweep in Congress is „clearly negative for the dollar and reinforces our view of further depreciation in 2021,“ Derek Halpenny, head of research for Emea Global Markets at MUFG Bank, tells the FT, adding that they now expect the greenback to fall more than previously estimated.
In the meantime, the Fed plans to keep interest rates near zero for years to come – or until they push inflation above 2 percent. That includes its commitment to buy $120 billion worth of government and corporate bonds each month. That means more pressure on the U.S. dollar.
The bearish bias is also likely to intensify as foreign currencies outperform amid a global economic recovery. At Goldman Sachs, analysts say investor demand for non-U.S. assets would devalue the dollar by at least 5 percent from its current level.
„The dollar remains near its cycle high with ample room for a multi-year downtrend,“ commented Gurpreet Gill, a strategist at Goldman Sachs Asset Management.
All things considered, Bitcoin could benefit from the dollar’s downtrend – as it has since March.
Institutional investors such as Paul Tudor Jones, Scott Minerd and Stan Druckenmiller have already allocated a portion of their multibillion-dollar portfolios to the cryptocurrency. Meanwhile, companies like MicroStrategy, MassMutual, Ruffer Investments and Square have been buying bitcoin to hedge risk.