The US dollar trend is about to reverse | Global currency landscape reshaping under the 2025 interest rate cut cycle

In September 2024, the Federal Reserve opened the door to interest rate cuts, a decision that is reshaping the global financial ecosystem. As interest rates decline, the attractiveness of the US dollar diminishes, and capital begins seeking higher returns, marking a turning point for the US dollar trend.

As the core of global settlement, the US dollar’s interest rate movements influence markets worldwide. According to the latest data forecasts, the Fed aims to lower interest rates to around 3% by 2026. This is not just a simple number game but a key variable that determines investment opportunities.

What is the logic behind the US dollar exchange rate?

Exchange rates essentially reflect the relative value of two currencies. When we see EUR/USD=1.04, it means 1 euro needs 1.04 dollars to exchange. If the index rises to 1.09, the euro appreciates and the dollar depreciates; conversely, if it drops to 0.88, the dollar appreciates.

The US Dollar Index is more complex; it tracks the weighted average performance of the dollar against six major currencies. It’s important to note that the Fed’s interest rate policies are not the sole determinants; the policies of other central banks are equally critical. If the European Central Bank maintains high interest rates while the US continues to cut rates, the US dollar trend will naturally weaken.

The four core forces driving the US dollar trend

1. The anticipatory effect of interest rate policies

High interest rates attract capital inflows into dollar assets, while low rates trigger capital outflows. However, investors often make the mistake of only looking at current policies and ignoring expectations. The market is highly efficient and will price in anticipated rate changes through dot plots long before official cuts occur.

2. Liquidity injection and contraction

Quantitative easing (QE) increases the supply of dollars, while quantitative tightening (QT) does the opposite. When the Fed implements QT, the amount of dollars in the market decreases, which should theoretically strengthen the dollar. But this effect takes time to fully manifest, and short-term volatility is often overshadowed by other factors.

3. Long-term drag from trade imbalances

The US has a long-term trade deficit, with imports exceeding exports significantly. Increased imports require more dollars for payments, which is short-term bullish for the dollar; increased exports reduce dollar demand, but these effects usually take months or even years to materialize. Future escalation of US tariffs will further suppress the dollar trend.

4. National credit and global confidence

This is the most underestimated factor. The dollar’s hegemony is built on global trust in the US economy and military strength. Recent waves of “de-dollarization”—such as the eurozone deepening integration, the rise of RMB crude oil futures, and the emergence of cryptocurrencies—are nibbling away at the dollar’s position. Since 2022, central banks worldwide have been accumulating gold in a silent vote of no confidence in the dollar.

What does fifty years of history tell us?

2008 Financial Crisis: Global panic led to a rush into the dollar for safety, causing a sharp appreciation.

2020 Pandemic: The Fed’s unlimited QE temporarily weakened the dollar, but it rebounded strongly after economic recovery.

2022-2023 aggressive rate hikes: The Fed raised rates aggressively 114 times, pushing the dollar index to a high of 114, sweeping away other currencies.

2024-2025 rate cuts begin: The dollar’s appeal wanes, capital flows into gold and cryptocurrencies, and the dollar trend starts to decline.

History shows that the US dollar does not move in a single direction but oscillates violently amid multiple factors.

How will the US dollar trend evolve in the next year?

Based on current conditions, the downside risks outweigh the positives:

• Globalization of trade wars: The US has upgraded from a strategic confrontation with China to a comprehensive trade offensive, reducing demand for the dollar as fewer companies do business with the US.
• Accelerating de-dollarization: Central banks continue to increase gold holdings, and the international payment system is diversifying.
• Narrowing interest rate differentials: As the US cuts rates, the Eurozone, Japan, and others are also lowering rates, diminishing relative attractiveness.

But don’t forget the essence of the dollar—it is the world’s largest safe-haven asset. When geopolitical shocks or financial crises occur, capital instinctively flows back into the dollar.

Therefore, the most likely path for the dollar trend is: a gradual weakening after oscillating at high levels, rather than a sharp one-way drop. Short-term volatility opportunities still exist, but in the long run, a depreciation bias prevails.

How will changes in the US dollar trend affect other assets?

Gold: The biggest beneficiary when the dollar weakens. A depreciating dollar lowers gold’s purchase cost, and in a low interest rate environment, the opportunity cost of holding gold decreases, providing dual benefits.

Stocks: Rate cuts stimulate capital inflows into equities, especially tech stocks. But if the dollar becomes too weak, foreign investors may shift their focus to Europe, Japan, or emerging markets.

Cryptocurrencies: A weakening dollar increases inflation risks, boosting demand for Bitcoin as “digital gold.”

Major currency pairs’ outlook:

USD/JPY: The Bank of Japan has ended ultra-low interest rates, and yen repatriation is pushing the yen higher. The probability of dollar weakening against the yen is high.

TWD/USD: The Taiwan dollar usually follows the US dollar, but domestic factors like the real estate market limit the scope for rate cuts, so appreciation is limited.

EUR/USD: The euro remains relatively strong, but the European economy is sluggish, and inflation remains high, so the dollar trend is unlikely to weaken significantly.

Practical tips for capturing US dollar trend fluctuations

Uncertainty equals trading opportunities. Monthly CPI releases, Fed meetings, and central bank decisions all trigger short-term volatility.

The key is to recognize that the era of a single upward dollar trend has ended. The rate-cutting cycle signals the formation of new capital flows—from chasing high interest rates to seeking safety, from dollar dominance to diversified assets. Early identification of this shift allows you to capitalize during the dollar’s depreciation cycle.