Goldman Sachs: Will a Weaker Dollar Boost the Crypto Market?

As the global financial market tries to predict the next move from the U.S. Federal Reserve (Fed), a new research report from investment bank Goldman Sachs has provided a detailed framework to assess the potential impacts. The report focuses on analyzing what would happen to various asset classes if the Fed were to adopt a more dovish policy stance.

Goldman Sachs has outlined four primary scenarios the market could face:

A pure dovish policy shock: The Fed cuts rates unexpectedly without a significant change in economic data.

Declining growth expectations: The market becomes pessimistic about the economic outlook, leading to bets that the Fed will be forced to cut rates.

Dovish policy with declining growth: A "hard landing" scenario where the Fed cuts rates, but the economy still enters a recession.

Dovish policy with upward growth: The ideal "soft landing" scenario where the Fed eases policy while the economy remains robust.

Across all four of these scenarios, the report identifies a few of the most stable trends: U.S. bond yields tend to fall (meaning bond prices rise), major currencies like the Euro, Japanese Yen, and Swiss Franc strengthen, and the price of gold increases. The performance of U.S. stocks, however, is highly dependent on the economic growth outlook.

For the crypto market, the trend of a weakening U.S. dollar is one of the most significant signals. Traditionally, the price of Bitcoin often has an inverse correlation with the strength of the USD. A weaker dollar increases the appeal of alternative and scarce assets like Bitcoin, making them cheaper for investors holding other currencies.

Goldman Sachs notes that the most beneficial scenario for risk assets (including crypto) is the fourth one: "dovish policy with upward growth." This is the perfect environment where loose monetary policy provides ample liquidity while a healthy economy boosts risk appetite. However, the report also warns that a decline in summer employment and inflation data could spark growth concerns, potentially pushing the market toward the less favorable third scenario.

Currently, the market appears to have started pricing in a more dovish Fed policy. But the next trend for both Wall Street and the crypto market will depend heavily on whether upcoming economic data paints a picture of a soft landing or a slowdown.