The Era of US Dollar Rate Cuts Is Coming | Complete Analysis of the 2025 US Dollar Exchange Rate Trends and Practical Trading Guide

The cycle of rate cuts has already begun. Starting from September 2024, the Federal Reserve initiated a new round of interest rate cuts, which not only changes the attractiveness of the US dollar but also reshapes the pattern of global capital flows. According to the latest policy guidance, US interest rates are expected to fall to around 3% by 2026.

As the world’s primary settlement currency, every policy shift involving the US dollar influences international markets. For investors, this presents both an opportunity to seize trends and a risk that should not be underestimated.

So, how is the US dollar exchange rate actually priced? Will it go up or down next? How should investors ride the wave?

Understanding the US Dollar Exchange Rate: The Deep Logic of the Exchange Rate

The US dollar exchange rate, simply put, is the price of US dollars in terms of other currencies. For example, EUR/USD indicates how many US dollars are needed to exchange for one euro. When EUR/USD rises from 1.04 to 1.09, it indicates euro appreciation and dollar depreciation; conversely, a drop to 0.88 suggests euro depreciation and dollar appreciation.

Unlike a single exchange rate, the US Dollar Index is a comprehensive indicator measuring the overall strength of the dollar, weighted by the US dollar against major currencies (euro, yen, pound, etc.).

Importantly, the fluctuations of the US Dollar Index are not only influenced by US monetary policy but also by the policies and economic performance of other central banks. A simple rate cut by the US does not guarantee a decline in the dollar index; it also depends on the comparative movements of global central banks.

Four Core Factors Driving the US Dollar Exchange Rate

1. Interest Rate Policies: The Most Direct Driver

Interest rates are a barometer of the dollar’s attractiveness. During periods of high interest rates, dollar assets offer attractive returns, attracting global capital and pushing the dollar higher; during low interest rate periods, capital seeks higher returns elsewhere, putting downward pressure on the dollar.

However, investors should not focus solely on rate hikes or cuts themselves; they need to understand market expectations for future policies. Markets are forward-looking; the dollar does not wait for rate cuts to start falling nor for rate hikes to be fully settled before reacting. That’s why monitoring the Federal Reserve’s dot plot (policy expectation chart) is crucial.

2. US Dollar Supply: The Hidden Hand of QE and QT

Quantitative easing (QE) and quantitative tightening (QT) determine the total supply of US dollars in the market. During QE, the Fed injects more dollars, increasing supply and exerting downward pressure on the dollar; during QT, the Fed withdraws dollars, reducing supply and potentially strengthening the dollar.

But these changes are not immediate; investors need to closely track the Fed’s balance sheet movements.

3. Trade Structure: Long-term Effects of Import-Export Imbalances

The US has maintained a trade deficit (imports exceeding exports) over the long term, which profoundly affects dollar supply and demand. Increased imports require more dollars for settlement, which is short-term positive for the dollar; increased exports reduce dollar demand, potentially weakening the dollar. However, such effects are mostly long-term and not easily observable in the short term.

4. Global Trust: The Invisible Support of Dollar Hegemony

The dollar’s status as the global reserve currency stems from worldwide trust in the US economy, political stability, and military influence. As long as the US maintains leadership in politics, economy, and technology, the dollar’s dominance remains secure.

However, in recent years, the de-dollarization wave has been gaining momentum. The eurozone integration, the rise of yuan-denominated oil futures, and the emergence of cryptocurrencies are nibbling away at the dollar’s absolute advantage. Since 2022, many countries have shifted towards gold purchases and sold US Treasuries, accelerating the de-dollarization trend.

If the US cannot effectively rebuild global confidence in the dollar, its liquidity will face long-term pressure, prompting the Fed to become more cautious in interest rate and balance sheet operations.

Historical Evolution of the US Dollar Exchange Rate: From Bretton Woods to Today

Over the past half-century, the US Dollar Index has experienced eight major phases, each marked by significant economic events:

• 2008 Financial Crisis: Market panic led to a flight to safety, with global capital rushing into the dollar, causing a sharp appreciation.
• 2020 Pandemic Shock: Massive US government stimulus measures temporarily weakened the dollar, but as the economy recovered, the dollar rebounded strongly.
• 2022-2023 Aggressive Rate Hike Cycle: The Fed raised interest rates sharply to combat inflation, strengthening the dollar against most currencies, with the dollar index surpassing 114.
• 2024-2025 Rate Cut Initiatives: Expectations of rate cuts emerged, capital shifted towards cryptocurrencies and gold, and the dollar weakened relatively.

In the long term, the de-dollarization process and US economic fundamentals will be key variables determining the future direction of the dollar index.

US Dollar Outlook for 2025: High Volatility and Likely Weakness After a High Plateau

Based on current multiple factors, the US dollar faces more downside than upside:

Bearish factors:

• Escalation of trade policies: US moves from unilateral tariffs against China to global tariff wars, which may dampen business with the US.
• Continued de-dollarization: Countries keep selling US Treasuries and increasing gold holdings, weakening dollar demand.
• Rate cut cycle begins: US dollar attractiveness declines, capital flows into higher-yield assets.

Therefore, the dollar index is likely to oscillate in the high range and gradually weaken over the next 12 months, rather than experiencing a sharp decline.

However, investors should be alert to a key risk: If geopolitical conflicts intensify or a new financial crisis erupts, the dollar’s safe-haven role will reassert itself immediately, and capital may rapidly flow back into the dollar.

Another critical point: Although the US is initiating rate cuts, most of the other major currencies (except the yen) are also cutting rates. Who cuts faster or more aggressively will directly influence the relative exchange rates. If the European Central Bank hesitates to cut while the Fed accelerates, the euro will appreciate against the dollar, putting pressure on the dollar.

Impact of the US Dollar Trend on Different Asset Classes

Gold: The Direct Beneficiary of a Weakening Dollar

A weakening dollar generally benefits gold. Since gold is priced in dollars, a decline in the dollar reduces the cost of gold in other currencies, boosting demand. Additionally, in a rate-cut environment, the opportunity cost of non-yielding assets like gold decreases, further enhancing its appeal.

Stock Market: The Dual Effect of Capital Flows

US rate cuts encourage capital inflows into stocks, especially technology and growth stocks. But if the dollar continues to weaken, international capital may shift toward Europe, Japan, or emerging markets, which could weaken the attractiveness of US equities.

Cryptocurrencies: A New Hedge Against Inflation

A weakening dollar implies declining purchasing power, prompting investors to seek inflation-hedging assets. Bitcoin, often called “digital gold,” is viewed as a store of value during global economic turbulence and dollar depreciation. During rate-cut cycles, cryptocurrencies may become a significant capital flow destination.

Specific Forecasts for Major Currency Pairs

USD/JPY (US dollar vs. Japanese yen): Japan is ending its ultra-low interest rate era; the yen may appreciate, leading to a potential decline in USD/JPY.

TWD/USD (New Taiwan dollar vs. US dollar): Taiwan’s interest rates tend to follow the dollar, but domestic policies (like housing market controls) may limit rate cuts. As an export-oriented economy, a weaker TWD benefits exports. Expect a modest TWD appreciation, but with limited magnitude.

EUR/USD (Euro vs. US dollar): The euro remains relatively strong against the dollar, but European economic weakness, persistent inflation, and sluggish growth suggest the ECB may be slower to cut rates than the Fed. The dollar may weaken slightly but not sharply.

How to Capture Investment Opportunities Amid the Dollar Shift

This rate cut cycle offers not only theoretical insights but real investment opportunities. The strength or weakness of the dollar impacts every investor’s returns and asset allocation strategies.

Short-term trading perspective: Before and after monthly CPI releases, the dollar index often experiences volatile swings. Savvy traders can anticipate these data releases, position themselves in long or short trades, and profit from short-term fluctuations.

Medium- to long-term allocation: The dollar’s appreciation cycle has quietly shifted, and capital is seeking new investment targets. Adjusting asset allocations early—adding gold, cryptocurrencies, or other non-dollar assets—can help seize the advantage.

Key takeaway: Uncertainty often breeds the greatest opportunities. As long as policy variables, geopolitical risks, or economic data exceed expectations, trading opportunities will arise. The key is to establish a systematic analysis framework, monitor core variables influencing the dollar exchange rate in real time, rather than passively waiting for market movements.

The era of rate cuts has arrived, and the trajectory of the dollar exchange rate will reshape the global capital landscape. Early insight and proactive positioning are essential to maintaining the initiative amid the changing landscape.