The logic behind the continuous rise of the US dollar: A comprehensive analysis of the 2025 exchange rate trend

How to View the US Dollar Exchange Rate?

The US dollar exchange rate reflects the relative value of a certain currency against the US dollar. For example, EUR/USD=1.04 means that it takes 1.04 dollars to exchange for 1 euro. When this number rises to 1.09, it indicates the euro has appreciated and the dollar has depreciated; conversely, a drop to 0.88 suggests the euro has depreciated and the dollar has appreciated.

The US Dollar Index is weighted based on the exchange rates of six major international currencies—euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc—against the US dollar. The index’s level directly reflects the relative strength of these currencies against the dollar. However, it’s important to note that a Fed rate cut does not necessarily lead to a decline in the dollar index; it also depends on whether the central banks of the component currencies have corresponding policy adjustments.

The US Dollar Index at a Critical Juncture

As of recent trading data, the dollar index hovers around 103.45, having broken below the 200-day moving average—a classic bearish signal. The dollar has been declining consecutively, indicating a strong bearish trend.

The latest US employment data released fell short of expectations, further reinforcing market expectations of multiple rate cuts by the Federal Reserve. Consequently, Treasury yields have fallen, suppressing the dollar’s attractiveness. Macroeconomic policy expectations are the core factors influencing the dollar’s price. If markets broadly anticipate more frequent rate cuts, the dollar is more likely to weaken; if not, it may strengthen.

Despite the possibility of short-term rebounds, the overall downward pressure remains. If the Fed indeed cuts rates multiple times and economic data continues to weaken, the dollar could face further downside pressure in 2025. Based on technical analysis, macro factors, and market expectations, the probability that the dollar index will remain bearish for some time is high, especially under the dual influence of oversold conditions and rate cut expectations. Short-term rebounds are possible, but in the long run, continued rate cuts and weak economic data could push the dollar index below 102.0.

Historical Perspective: The Eight Major Cycles of the Dollar

To understand why the dollar has been rising or falling, it’s necessary to look back at history. Since the collapse of the Bretton Woods system in 1971, the dollar index has gone through eight distinct phases:

Decline Period (1971-1980): Nixon announced the end of the gold standard, decoupling gold from the dollar. The oil crisis triggered high inflation, and the dollar index fell below 90.

Recovery Period (1980-1985): Fed Chairman Paul Volcker aggressively raised interest rates to 20%, maintaining high rates of 8-10%, pushing the dollar index to a peak in 1985.

Recession Period (1985-1995): The US faced twin deficits (fiscal and trade), leading to a long-term bear market for the dollar.

Boom Period (1995-2002): The Clinton era’s internet boom drove US growth, attracting capital inflows, and pushing the dollar index to 120.

Crisis Period (2002-2010): Dot-com bubble burst, 9/11, financial crisis, and quantitative easing caused the dollar index to plunge to lows around 60.

Rebound Period (2011-2020): The Eurozone debt crisis and China stock market crash occurred; the US remained relatively stable, with Fed rate hike expectations strengthening the dollar.

Turning Point (2020-2022): COVID-19 pandemic led to zero interest rates and large-scale stimulus, causing the dollar to fall sharply, with inflation surging afterward.

Adjustment Period (2022-2024 bottom): Inflation spiraled out of control, prompting the Fed to aggressively raise rates to a 25-year high and initiate quantitative tightening (QT). While curbing inflation, this also shook confidence in the dollar.

Major Currency Pair Trends Forecast

EUR/USD: Looking for Opportunities in Reversal

EUR/USD moves almost inversely to the dollar index. Dollar depreciation, improved ECB policies, and divergent economic outlooks tend to push EUR/USD higher. If Fed rate cut expectations materialize and US economic growth slows, while Europe’s economy continues to improve, EUR/USD could further rise.

Recent data shows EUR/USD has risen to 1.0835, demonstrating a sustained upward trend. If it stabilizes at this level, the probability of testing key psychological levels like 1.0900 increases. On the technical side, previous highs and trendlines may serve as strong support, with 1.0900 being a critical resistance. Breaking through could lead to further gains.

GBP/USD: Beneficiary of Policy Divergence

The GBP/USD trend logic is similar to EUR/USD, due to close economic ties between the UK and US. Market expectations that the Bank of England will cut rates less than the Fed support the pound. If the BoE remains cautious, GBP will be relatively stronger against the dollar.

Supported by positive technical signals, GBP/USD is expected to maintain a sideways upward trend in 2025, with a core trading range of 1.25-1.35. Policy divergence and risk aversion are the main drivers. If economic and policy paths between the UK and US further diverge, the exchange rate could break above 1.40, but political risks and liquidity shocks should be watched for potential pullbacks.

USD/CNY: The Tug-of-War of Economic Policies

The performance of USD against CNY depends on market supply and demand as well as economic policies of both countries. If the Fed continues to hike rates and China’s economy slows, the yuan will face increased pressure, and USD/CNH could rise. The People’s Bank of China’s exchange rate policy and market interventions will have a profound impact on long-term trends.

Technically, USD trades within 7.2300-7.2600, lacking short-term breakout momentum. Investors should closely monitor breakouts in this range—once broken, new trading opportunities may emerge. If USD falls below 7.2260 and technical indicators show oversold or rebound signals, short-term long positions could be considered.

USD/JPY: Japan’s Recovery Constraints

USD/JPY is one of the most liquid currency pairs globally. Japan’s January basic wage growth of 3.1% year-on-year, the highest in 32 years, indicates Japan may be emerging from a long-term low-inflation, low-wage environment. Rising wages and inflation pressures could prompt the Bank of Japan to adjust interest rates in the future. If the US applies pressure, Japan may accelerate rate hikes.

Forecast for 2025: USD/JPY will trend downward. Expectations of rate cuts and Japan’s economic recovery are key drivers. Technical analysis shows that if USD/JPY breaks below 146.90, further testing downward is likely; reversing the downtrend requires breaking above 150.0 resistance.

AUD/USD: Opportunities for Commodity Countries

Recent Australian data shows Q4 GDP grew 0.6% quarter-on-quarter and 1.3% year-on-year, both above expectations. January trade surplus rose to 56.2 billion, indicating strong performance. These data support a stronger Australian dollar. The Reserve Bank of Australia remains cautious, implying a low likelihood of rate cuts, which suggests a relatively hawkish stance compared to other economies, supporting AUD.

Despite positive data, risks from US dollar adjustments and global economic uncertainties remain. If the Fed continues easing in 2025, a weaker dollar will help push AUD/USD higher.

How to Capture Trading Opportunities in 2025?

Short-term Strategy (Q1-Q2): Capture Waves in Structural Volatility

In a bullish scenario, escalating geopolitical conflicts (e.g., Taiwan Strait tensions) could rapidly push the dollar index to 100-103; US economic data exceeding expectations may delay rate cuts, leading to a dollar rebound.

In a bearish scenario, continuous Fed rate cuts and the ECB’s shift to easing could strengthen the euro, pushing the dollar index below 95; worsening US debt crisis (e.g., cold debt auctions) could heighten dollar credit risk.

Aggressive traders can buy low and sell high within the DXY 95-100 range, using technical indicators to catch reversals; conservative investors should wait for clearer Fed policy signals.

Mid-to-Long Term Strategy (Post Q3): Mild Dollar Weakening and Shift to Alternative Assets

A deepening Fed rate cut cycle will reduce US Treasury yield advantages, prompting capital flows into high-growth emerging markets or recovering Eurozone assets. If de-dollarization accelerates globally, the dollar’s reserve status will weaken marginally.

It is advisable to gradually reduce dollar long positions and allocate to reasonably valued non-dollar currencies (yen, AUD) or commodities-related assets (gold, copper).

In 2025, dollar trading will heavily depend on “data-driven” and “event-sensitive” factors. Only by maintaining flexibility and discipline can traders capture excess returns amid exchange rate fluctuations.