2025 US Dollar Trends Diverge: Exchange Rate Forecasts and Trading Opportunities

Basic Logic of the US Dollar Exchange Rate

The US dollar exchange rate reflects the value of a currency relative to the US dollar. Taking the euro as an example, EUR/USD=1.04 indicates that 1 US dollar can exchange for 0.96 euros, and conversely, 1 euro requires 1.04 US dollars. When EUR/USD rises to 1.09, the euro appreciates relative to the dollar; if it falls to 0.88, the euro depreciates and the dollar appreciates.

The US Dollar Index is a comprehensive measure of the dollar’s strength, calculated as a weighted average of the exchange rates of the dollar against six major currencies: euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. However, it’s important to note that movements in the Dollar Index do not directly equate to changes in Federal Reserve policies—central bank policies of the component currencies also have a significant impact.

The Current Critical Point of the US Dollar Index

As of the most recent trading day, the US Dollar Index fell to a low not seen since November (around 103.45), declining for five consecutive trading days and breaking below the 200-day moving average for the first time—often seen as a bearish signal.

This decline was mainly driven by US employment data falling short of expectations. The non-farm payrolls released in March were below market forecasts, reinforcing investor expectations of further rate cuts by the Federal Reserve, which in turn lowered US Treasury yields and weakened the attractiveness of the dollar.

From a medium-term perspective, the direction of the dollar is determined by the Fed’s monetary policy stance. If expectations for rate cuts continue to strengthen, the dollar’s weakness will intensify; conversely, a reversal could trigger a rebound. Although there is a short-term possibility of technical rebounds, the overall trend remains bearish for the dollar.

Conclusion: It is expected that the US Dollar Index will remain in a bearish pattern for a considerable period in 2025, especially under the dual influence of oversold conditions and rate cut expectations. If the Fed maintains an easing policy and economic data remains weak, the dollar could further decline below the support zone of 102.00.

Analyzing the Historical Cycles of the Dollar and Its Current Position

Over the past 50+ years since the collapse of the Bretton Woods system, the US Dollar Index has gone through eight distinct phases:

1971-1980 Collapse Period: After the end of the gold standard, the dollar entered a period of excess. Coupled with high inflation from the oil crisis, the dollar index fell below 90.

1980-1985 Strong Recovery: Fed Chairman Paul Volcker used aggressive measures to curb inflation, raising the federal funds rate to 20%. The high interest rate policy attracted capital back to the US, pushing the dollar index to a historic peak in 1985, ending the dollar bull market.

1985-1995 Long Bear Market: The US faced simultaneous fiscal and trade deficits, creating a “double deficit” scenario that dragged the dollar down over the long term.

1995-2002 Internet Boom: Under Clinton’s administration, the US economy grew strongly, capital flowed in large volumes, and the dollar index surged to 120.

2002-2010 Recession and Crisis: The burst of the dot-com bubble, 9/11 attacks, prolonged quantitative easing, and the 2008 financial crisis caused the dollar index to plunge to around 60.

2011-2020 Early Euro Debt Crisis Arbitrage: Europe was mired in debt crises, China experienced stock market crashes, and the US remained relatively stable with multiple rate hikes by the Fed, which should have supported a stronger dollar.

2020-2022 Pandemic Money Printing: After COVID-19 outbreak, the Fed cut rates to zero and flooded the economy with liquidity, causing a sharp decline in the dollar index and triggering severe inflation.

2022-2024 High-Interest Rate Cycle: Inflation spiraled out of control, forcing the Fed into aggressive rate hikes, raising the federal funds rate to a 25-year high, and initiating quantitative tightening (QT). While this suppressed inflation, it also challenged confidence in the dollar.

Currently, the dollar is at the tail end of the eighth phase, with high interest rates but expectations of rate cuts already emerging.

Forecast of Major Currency Pairs in 2025

EUR/USD: Logic of Euro Strengthening

EUR/USD moves almost inversely to the dollar index. Benefiting from expectations of dollar depreciation, improved European Central Bank policies, and diverging US and European economies, EUR/USD is expected to continue rising.

Latest data shows EUR/USD has risen to 1.0835, indicating sustained upward momentum. If it stabilizes at this level, it may challenge the psychological barrier of 1.0900. On the technical side, previous highs and trendlines may provide support, while 1.0900 is a key resistance. Breaking through this resistance could lead to further gains.

GBP/USD: Relative Strength of the Pound

The UK economy’s deep connection with the US economy means GBP/USD tends to follow a similar trend to EUR/USD. Market expectations of a slower pace of rate cuts by the Bank of England compared to the Fed support the pound. If the BoE adopts a more cautious rate cut approach, GBP/USD will likely strengthen.

With positive technical signals, it is expected that GBP/USD will mostly fluctuate upward in 2025, within a core range of 1.25-1.35. Diverging policy paths and risk aversion will be main drivers. If the UK and US economies and policies diverge further, the exchange rate could challenge above 1.40, but caution is needed regarding political risks and liquidity shocks that may cause pullbacks.

USD/CNH: Pressures Facing the Renminbi

The USD/CNY exchange rate is influenced by multiple factors: Fed policies, China’s economic cycle, and PBOC’s interventions. If the Fed maintains high interest rates while China’s economy slows, the renminbi could face pressure, pushing USD/CNH higher.

Technically, the dollar is consolidating in the 7.2300-7.2600 range, with little short-term momentum for a breakout. Investors should watch for key breakouts in this zone. If USD falls below 7.2260 and technical indicators show oversold signals, it could present a short-term buying opportunity for a rebound.

USD/JPY: Possible Yen Appreciation

USD/JPY is one of the most liquid currency pairs globally, with the dollar as the primary reserve currency and the yen ranking fourth. Japan’s January basic wages increased by 3.1% year-on-year, the highest in 32 years, indicating a potential shift in Japan’s long-term low inflation and low wages environment. Rising wages and inflation pressures may prompt the Bank of Japan to adjust interest rates in response to depreciation concerns. International pressures (especially from the US) may accelerate rate hikes.

It is expected that USD/JPY will trend downward in 2025. Market expectations of rate cuts and Japan’s economic recovery will be the main trading drivers. Technically, if USD/JPY breaks below 146.90, it will further test lower levels; reversing the downtrend requires breaking above 150.0 resistance.

AUD/USD: Resilience of the Australian Dollar

Latest Australian data shows Q4 GDP grew by 0.6% quarter-on-quarter and 1.3% year-on-year, both exceeding expectations. January’s trade surplus rose to 56.2 billion AUD, showing strong performance. The Reserve Bank of Australia remains cautious, implying a low likelihood of rate cuts, which suggests a relatively hawkish stance.

While positive data supports the AUD, potential adjustments in the dollar and global economic uncertainties warrant caution. If the Fed continues easing in 2025, a weaker dollar will support AUD/USD’s rise.

2025 US Dollar Trading Strategy Framework

Short-term (Q1-Q2): Structural Range Trading

Bullish scenario: Geopolitical conflicts could cause the dollar index to quickly surge to 100-103; if US economic data exceeds expectations (e.g., non-farm payrolls over 250,000), market may delay rate cut expectations, leading to a dollar rebound.

Bearish scenario: Continuous Fed rate cuts combined with delayed ECB easing could strengthen the euro, pushing the dollar index below 95; or rising US debt crisis risks could elevate dollar credit risk.

Aggressive approach: Short-term trading within the 95-100 range, using MACD divergence, Fibonacci retracements, and other technical indicators to catch reversal opportunities.

Conservative approach: Wait-and-see, until Fed policy path becomes fully clear.

Medium to Long-term (Post-Q3): Gradual Shift to Non-USD Assets

As the Fed’s rate cut cycle deepens, US Treasury yield advantages will narrow, prompting capital flows into high-growth emerging markets and recovering Europe. If de-dollarization accelerates globally, the dollar’s reserve currency status will weaken marginally. It is advisable to gradually reduce long dollar positions and allocate to reasonably valued non-USD currencies (JPY, AUD) or commodities (gold, copper).

Core Principle: In 2025, trading the dollar will require higher sensitivity to data and event reactions. Only by maintaining flexibility and discipline can traders seize opportunities amid exchange rate volatility.