The US dollar faces downward pressure | Analysis of the USD trend and investment opportunities during the 2025 rate cut cycle

The US dollar is at a crossroads. Since the start of the rate cut cycle at the end of 2024, this world’s primary settlement currency has faced new market tests. When money becomes cheaper, where will capital flow? Will the dollar continue to weaken, or is this just a phase of volatility? This not only relates to the pulse of global financial markets but also directly impacts every investor’s asset allocation.

Why Might the US Dollar Face a Downturn?

Rate cuts mean decreased attractiveness. As the Federal Reserve gradually lowers its target interest rate to around 3% (expected to be achieved before 2026), the appeal of the dollar as a safe-haven asset diminishes. High interest rates once attracted global capital like a magnet, but this landscape is now changing.

But that’s not all. Currently, the factors supporting a weaker dollar are far more numerous than reasons for a rally:

Trade policy risks intensify — The US is preparing to implement more aggressive tariffs on global trade partners. This will directly reduce commercial exchanges with the US, decrease demand for the dollar, and drag down its exchange rate.

De-dollarization wave continues — The Eurozone’s establishment, the launch of RMB crude oil futures, the rise of cryptocurrencies… Countries are seeking settlement options outside of the dollar. Since 2022, many nations have shifted toward buying gold reserves instead of US Treasuries, and this loss of confidence poses long-term risks to the dollar’s trend.

Competing currencies also cut rates simultaneously — Don’t forget a key point: the major currencies in the dollar index (except the yen) are also beginning to cut interest rates. The faster and deeper they cut, the more they appreciate relative to the dollar. If the European Central Bank’s rate cuts are smaller than the Fed’s, the euro will appreciate against the dollar, naturally putting pressure on the US currency.

The Deep Logic Behind Exchange Rate Fluctuations: Four Core Drivers

Interest Rate Policy — The Most Direct Catalyst

High interest rates attract capital inflows, low interest rates do the opposite. But there’s a trap: markets tend to react in advance. They won’t wait for the Fed to officially cut rates before the dollar starts to decline, nor will they wait for rate hikes before the dollar rises. Investors must pay attention to Fed policy expectations and the dot plot, because markets are efficient and will price in these expectations ahead of time.

Money Supply — The Invisible Hand

Quantitative easing (QE) increases dollar supply → dollar depreciation; quantitative tightening (QT) reduces dollar supply → dollar appreciation. The 2024-2025 rate cut cycle is essentially an extension of easing policies, further diluting the dollar’s value.

International Trade Structure — Long-term Hidden Force

The US’s long-term trade deficit (imports > exports) affects dollar supply and demand. Increased imports require more dollars, pushing up the exchange rate; increased exports do the opposite. But these changes usually manifest over the long term and are not prone to sharp short-term fluctuations.

US Global Credibility — The Most Easily Overlooked Factor

The dominance of the dollar stems from global trust in the US. However, this trust is being eroded. De-dollarization is not just an economic issue but also a political and confidence issue. If the US cannot effectively restore international confidence, dollar liquidity will face long-term pressure.

What Do History Lessons Tell Us?

Over the past 50 years, the dollar has experienced eight major cycles. Several landmark moments are worth noting:

• 2008 Financial Crisis: During panic, capital flooded back into the dollar, causing a short-term surge.
• 2020 Pandemic Period: After significant stimulus, the dollar weakened briefly but rebounded with economic recovery.
• 2022-2023 Rate Hike Cycle: The Fed’s aggressive rate hikes pushed the dollar index above 114, making the dollar the world’s strongest currency.
• 2024-2025 Rate Cut Initiation: The dollar’s attractiveness diminishes, and capital shifts toward gold, cryptocurrencies, and other alternative assets.

History shows that the dollar will not only plummet unilaterally. When geopolitical conflicts or financial crises erupt, safe-haven funds tend to flow back into the dollar. But the overall trend is clear: Downward pressure on the dollar is evident, and future movements are more likely to be choppy at high levels and gradually weaken, rather than a rapid collapse.

Chain Reactions of the US Dollar’s Trend on Major Assets

Gold — Beneficiary of a Falling Dollar

A weaker dollar directly lowers the cost of buying gold, boosting demand. Plus, rate cuts make gold more attractive relative to other assets (since gold has no interest), providing a double positive for gold prices.

Stock Markets — Opportunities and Risks

Rate cuts stimulate US stocks, especially tech and growth stocks. But if the dollar weakens excessively, foreign capital may shift to Europe, Japan, or emerging markets, reducing the attractiveness of US equities.

Cryptocurrencies — Revaluation of Inflation Hedges

A declining dollar means reduced purchasing power, prompting investors to seek assets that hedge against inflation. Bitcoin, as “digital gold,” often performs strongly in environments of dollar weakness.

Individual Movements of Major Currency Pairs

USD/JPY: Japan has ended ultra-low interest rates, and yen capital flows are expected to reverse, leading to yen appreciation and dollar depreciation.

TWD/USD: Taiwan’s interest rates follow the dollar, but domestic factors (like housing market regulation) limit rate cuts, resulting in a mild appreciation of the TWD.

EUR/USD: Europe’s economy remains weak, but the euro is relatively resilient. If the European Central Bank is cautious about rate cuts, dollar depreciation pressure will persist.

How Can Investors Capture Opportunities Amid Volatility?

Uncertainty itself is a source of opportunity. In the short term, every economic data release (CPI, employment reports, etc.) can trigger sharp swings in the dollar index. Savvy traders can position themselves before and after these events, going long or short on relevant currency pairs.

The key is not to predict whether the dollar will fall but to identify the timing and rhythm of volatility. During a rate cut cycle, every revision of policy expectations can rewrite market pricing. For investors interested in forex trading, mastering the timing of information releases and understanding policy trends is more practical than blindly betting on a one-sided trend.

This dollar adjustment cycle is both a challenge and an opportunity to reshape your investment portfolio. As long as you can seize the volatility rather than be overwhelmed by it, you can achieve gains in the context of a declining dollar.