How will the US dollar trend evolve in 2025? Outlook on major currency pairs and trading strategies

The Core Logic of the US Dollar Exchange Rate

The essence of the US dollar exchange rate reflects the relative value of a currency against the US dollar. Taking the EUR/USD currency pair as an example, EUR/USD=1.04 indicates that 1.04 US dollars are needed to exchange for 1 euro. When this ratio rises, it means the euro is appreciating and the dollar is depreciating; conversely, the dollar appreciates.

The US Dollar Index is an important tool to measure the overall strength of the dollar. It is weighted based on the exchange rates of the dollar against six major currencies: euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. It is important to note that the movements of the US Dollar Index are not simply correlated with Federal Reserve policies—coordinated actions by the central banks of the component countries also have a significant impact.

The Historical Cycles of the US Dollar

Since the collapse of the Bretton Woods system in 1971, the US Dollar Index has experienced eight complete cycle phases:

Decline Period (1971-1980): After the end of the gold standard, the dollar flooded the market, compounded by oil crises, causing the dollar index to fall below 90.

Rebound Period (1980-1985): Former Fed Chairman Volcker aggressively raised interest rates to 20%, pushing the dollar index to a historic peak in 1985, marking the end of the dollar bull market in the 1990s.

Weakening Period (1985-1995): The US “double deficit” (fiscal deficit + trade deficit) became prominent, leading the dollar into a prolonged bear market lasting ten years.

Internet Boom Period (1995-2002): Strong economic growth during the Clinton era drove the dollar index above 120 points.

Crisis Adjustment Period (2002-2010): The burst of the internet bubble and the financial tsunami hit, and quantitative easing caused the dollar to decline sharply, dropping to around 60 at its lowest.

Risk Appetite Period (2011-2020 early): Compared with the European debt crisis and China’s stock market crash, US economic stability became evident, and Fed rate hike expectations boosted the dollar.

Pandemic Easing Period (2020-2022 early): Under COVID-19 shocks, the Fed cut the benchmark interest rate to 0 and implemented quantitative easing, leading to a significant decline in the dollar index.

Inflation Fight Period (2022-2024 end): The Fed aggressively raised interest rates to a 25-year high and started quantitative tightening. While inflation was suppressed, dollar confidence was also weakened.

US Dollar Outlook: Key Currency Pair Trends in 2025

Euro/US Dollar (EUR/USD) Outlook

Driven by expectations of dollar depreciation and improvements in European Central Bank policies, if the Fed continues to cut rates as market expectations and the US economy slows down materialize, the EUR/USD pair is expected to maintain an upward trend. Recent trading data shows EUR/USD has risen to 1.0835, with 1.0900 being a key resistance level. Once this level is broken, further upside potential may be sought.

GBP/USD Outlook

The pound’s movement is highly correlated with the euro, but since market expectations suggest the Bank of England will slow its rate cuts compared to the Fed, this provides some support for the pound. It is expected that in 2025, GBP/USD will maintain a sideways upward structure within the range of 1.25-1.35. If divergence in economic policies between the UK and US intensifies, the exchange rate could challenge the high above 1.40, but geopolitical risks should be watched for potential pullbacks.

USD/CNH (US Dollar/Renminbi) Changes

The direction of USD/CNH depends on two factors: the Fed’s policy stance and China’s exchange rate management. If the Fed continues tightening while China’s economy faces pressure, the renminbi may weaken, leading to dollar appreciation. Technically, USD/CNH is oscillating between 7.2300-7.2600, lacking clear breakout momentum. A break below 7.2260 could offer a short-term rebound opportunity.

USD/JPY Outlook

Japan’s wage growth hit a 32-year high (up 3.1% YoY in January), indicating a shift from the long-standing low inflation and low wages pattern. This may prompt the Bank of Japan to adjust its interest rate policy, especially under international pressure to accelerate rate hikes. Therefore, USD/JPY is expected to trend downward in 2025, with key support at 146.90. To reverse the downward trend, a break above 150.0 is needed.

AUD/USD Performance

Australia’s economic data are strong—Q4 GDP grew 0.6% QoQ and 1.3% YoY, both exceeding expectations, with a trade surplus reaching a high of 56.2 billion. The Reserve Bank of Australia remains cautious, implying a low likelihood of rate cuts, which keeps the Australian dollar competitive against the US dollar. Despite global economic uncertainties, if the Fed continues easing in 2025, dollar weakness will support AUD/USD to rise.

US Dollar Trading Strategies: How to Capture Volatility Opportunities

Short-term (Q1-Q2) strategies:

Triggers for bullish positions include rapid dollar rallying to 100-103 amid escalating geopolitical conflicts, and market expectations of delayed rate cuts due to strong US economic data. Bearish scenarios include continuous Fed rate cuts, improved ECB policies causing the dollar index to fall below 95, or US debt issues triggering credit risks.

Trading advice: aggressive investors can use technical indicators (like MACD divergence, Fibonacci retracement) within the 95-100 DXY range to capture swing opportunities; conservative investors should wait for clearer Fed policy signals.

Medium to long-term (post-Q3) allocation ideas:

As the Fed deepens rate cuts, US Treasury yields may decline, prompting funds to flow back into high-growth emerging markets or the Eurozone recovery. Meanwhile, if the global trend of de-dollarization accelerates, the dollar’s reserve currency status will gradually erode.

Investment strategies include gradually reducing dollar long positions and increasing holdings of reasonably valued non-dollar currencies (like yen, AUD) or commodities-linked assets (gold, copper).

Overall, US dollar trading in 2025 will become more data-driven and event-sensitive. Maintaining sufficient flexibility and strict risk discipline is essential to achieve excess returns amid exchange rate fluctuations.