The USD Trend in the Rate Cut Cycle: 2025 Exchange Rate Outlook and Investment Allocation Guide

Rate Cuts Initiated, Is the US Dollar Facing a Turning Point?

By the end of 2024, the world’s most critical monetary policy has shifted— the Federal Reserve has officially begun a rate-cutting cycle, aiming to lower interest rates to around 3% by 2026. What does this decision mean for global financial markets? In simple terms, when US interest rates decline, the cost of capital decreases, prompting investors who relied on high yields to seek other outlets—gold, stocks, crypto assets, and even other major currencies.

The rise and fall of the US dollar are not isolated phenomena; they influence global trade settlement, central bank foreign exchange reserves, and individual investors’ asset allocation decisions. Understanding the logic behind the dollar’s trend is crucial for seizing trading opportunities.

The Core Drivers of the US Dollar Trend: Not Just Interest Rates

Many investors make the same mistake—predicting a fall in the dollar simply because rates are cut. But reality is far more complex.

The Time Lag Effect of Monetary Policy

Markets are efficient; they do not wait for rate cuts to actually happen before reacting. Investors start adjusting their dollar positions as early as when the Federal Reserve releases dot plot expectations. Therefore, tracking only the current rate hikes or cuts is insufficient; attention must be paid to the direction of policy expectations. This is why the same rate cut can lead to very different dollar reactions.

The Hidden Impact of Dollar Supply

Quantitative easing (QE) and quantitative tightening (QT) control liquidity. QE increases dollar supply, lowering its value; QT does the opposite, reducing supply and pushing the dollar higher. However, these effects are not immediate; they are reflected in exchange rates through expectations in advance.

The Truth About the US Dollar Index: Competitors Are Also Changing

The US Dollar Index (DXY) is not determined solely by the dollar itself but by its relative strength against a basket of major currencies (euro, yen, pound, etc.). While the Fed cuts rates, the European Central Bank, Bank of Japan, and Bank of England are also adjusting policies. Who cuts faster or more aggressively directly influences exchange rates. In other words, US rate cuts do not necessarily lead to a decline in the dollar index; the pace of other central banks matters too.

Overlooked Factors: The Long-term Impact of Global De-dollarization

Since the US aggressively raised rates in 2022, there has been continuous questioning of the dollar’s dominance worldwide. De-dollarization is no longer a theoretical hypothesis but a reality in progress.

Countries are increasing gold purchases, promoting local currency settlement, and reducing holdings of US Treasuries. The rise of the euro, renminbi oil futures, and cryptocurrencies are nibbling away at dollar hegemony. Especially as geopolitical risks intensify, US sanctions on other nations have heightened global doubts.

The US’s creditworthiness issues have become a long-term hidden risk for the dollar index. If the US cannot effectively restore confidence among other countries, dollar liquidity may gradually decline—this is a deeper reason why the Fed has become particularly cautious in its rate decisions.

Historical Lessons on Dollar Trends: Pattern Recognition

Over the past 50 years, the dollar index has gone through 8 significant phases. Observing these key moments can help better understand the current situation:

• 2008 Financial Crisis: Market panic drove capital back into the dollar, causing a sharp appreciation.
• 2020 Pandemic Period: QE temporarily lowered the dollar, but subsequent economic recovery pushed the dollar higher.
• 2022-2023 Rate Hike Cycle: The Fed aggressively raised rates, with the dollar index soaring to 114, exerting enormous pressure on global liquidity.
• 2024-2025 Rate Cut Cycle: The Fed shifts to easing, weakening the dollar’s appeal, and capital flows into high-yield assets.

The pattern is clear: during financial crises, the dollar appreciates (as a safe haven); during stable economic periods, the dollar weakens (risk appetite increases).

Outlook for the US Dollar in 2025: Range-bound Fluctuations Rather Than a One-way Downtrend

Based on current conditions, the dollar index is more likely to show “high-level oscillation and gradual weakening” over the next 12 months rather than a sharp, one-directional decline.

Negative factors dominate: escalating trade tensions, accelerated de-dollarization, synchronized rate cuts worldwide—all unfavorable for the dollar. But investors should not overlook a key characteristic—the dollar is fundamentally a safe-haven currency. As long as geopolitical tensions and financial uncertainties rise, capital will continue to flow into the dollar for refuge.

Additionally, among the currencies in the dollar index, except for the yen, other major currencies are also cutting rates. The relative pace of rate cuts by each central bank will determine exchange rates—if the US cuts faster and Europe more slowly, the euro will appreciate, and the dollar will weaken comparatively.

Chain Reactions of the Dollar Trend on Various Assets

Gold: The Direct Beneficiary

When the dollar weakens, gold benefits. Gold is priced in dollars; a depreciating dollar reduces the cost of gold, increasing demand. Plus, in a rate-cut environment, the opportunity cost of holding gold decreases (since non-yielding assets become relatively more attractive), pushing up gold prices.

Stock Markets: Structural Opportunities and Risks Coexist

Rate cuts encourage capital inflows into stocks, especially tech and growth stocks. But if the dollar weakens excessively, foreign investors might shift to Europe, Japan, or emerging markets, reducing the attractiveness of US stocks. Capital flows depend on relative yield opportunities.

Cryptocurrencies: Rising Demand for Inflation Hedges

A weakening dollar signifies declining purchasing power. Bitcoin, as “digital gold,” is often viewed as a store of value during economic turmoil, dollar depreciation, or rising inflation. In a rate-cut environment, traditional assets’ yields decline, making risk assets more attractive.

Key Exchange Rate Focuses

USD/JPY (US dollar vs. Japanese yen): As the Bank of Japan ends its ultra-low interest rate era, capital will flow back into Japan. A likely scenario is yen appreciation and USD/JPY weakening.

TWD/USD (Taiwan dollar vs. US dollar): Taiwan’s interest rate policy usually follows the US, but is limited by housing market controls. As an export-oriented economy, a weaker TWD benefits exports, so a moderate TWD appreciation is expected.

EUR/USD (Euro vs. US dollar): The euro is currently relatively strong, but Europe’s economy remains weak, with persistent inflation. If the European Central Bank gradually cuts rates, the dollar may weaken slightly but not sharply.

Seizing Trading Opportunities from the Dollar Trend

Currency fluctuations are not just financial news—they directly impact investment returns, asset allocation, and retirement planning. This rate-cutting cycle signals a new market rhythm, with capital flows shifting and opportunities emerging.

Short-term Trading Perspective

Monthly economic data releases (CPI, non-farm payrolls, PMI) trigger volatility in the dollar index. Precise timing, analyzing expectations versus actual results, can help capture short-term trading opportunities. Decisions to go long or short should be based on data analysis and market sentiment, not solely on policy directions.

Medium- to Long-term Positioning

Uncertainty always accompanies opportunity. Geopolitical risks, central bank policy adjustments, and economic surprises can reshape the dollar trend. The key is to position early and follow the trend rather than passively waiting. Diversifying assets among the dollar, gold, other major currencies, and risk assets can better navigate this transitional market environment.