The risk of the US dollar plummeting amid the interest rate cut wave | 2025 USD trend analysis and new ideas for asset allocation

In September 2024, the Federal Reserve begins a cycle of interest rate cuts, a decision that impacts global markets’ nerves. Simply put, lowering interest rates means a decline in the attractiveness of the US dollar, prompting capital to flow into riskier assets, and the US dollar faces significant depreciation pressure. According to the latest dot plot forecast, the Fed aims to bring the US interest rate down to around 3% before 2026.

For investors, this presents both opportunities and challenges. As the world’s primary settlement currency, every move of the US dollar influences international trade settlements, government foreign exchange reserves, and consequently the global market dynamics. So, in this wave of rate cuts, will the US dollar really plummet? How should one position for the future?

US Dollar Exchange Rate: The Key Variable Determining Your Investment Returns

The US dollar exchange rate essentially reflects the “exchange ratio” between the dollar and other currencies. For example, EUR/USD = 1.04 indicates that 1 US dollar can be exchanged for 0.96 euros, or 1.04 dollars for 1 euro. When this ratio rises, it signifies euro appreciation and dollar depreciation; conversely, it indicates dollar appreciation.

It’s important to note that the US Dollar Index (DXY) reflects the overall performance of the dollar against a basket of major currencies, not just a single currency pair. The movement of the dollar index is influenced not only by US monetary policy but also by the policies and economic conditions of major economies like the Eurozone and Japan. Therefore, a unilateral rate cut by the US does not necessarily lead to a sharp decline in the dollar index; other countries’ policy directions must also be observed.

Four Major Factors That Decide Whether the US Dollar Will Collapse

1. Interest Rate Policies: The Trap of Dual Expectations

Interest rates are the most direct driver of the US dollar exchange rate. When rates are high, the dollar’s appeal increases, attracting capital inflows; when rates are low, capital flows to higher-yield markets, weakening the dollar.

But there’s a crucial trap: Investors should not only focus on the current rate hikes or cuts but also on market expectations. Markets tend to react in advance. The dollar does not wait for rate cuts to start falling, nor for rate hikes to begin rising. This is often gauged through the Fed’s dot plot to understand market expectations.

2. Money Supply: The Tug-of-War Between QE and QT

Quantitative easing (QE) and quantitative tightening (QT) directly affect the amount of US dollars in circulation. When the Fed implements QE, dollar supply increases, and the dollar’s value tends to decline; during QT, dollar supply decreases, potentially strengthening the dollar.

However, these effects are not immediate; markets need time to digest policy changes.

3. Trade Structure: Long-term Drag from Trade Imbalances

The US has maintained a long-term trade deficit, importing more than exporting. Increased imports require more dollars, pushing the dollar higher; increased exports reduce dollar demand, possibly leading to depreciation. These impacts are usually long-term and not immediately visible.

4. International Confidence and Competition: The Hidden Risks of De-dollarization

The dollar’s status as the global reserve currency stems from worldwide trust in the US. However, recent years have seen the rise of the euro, renminbi, and cryptocurrencies challenging the dollar’s dominance. Since 2022, the de-dollarization trend has accelerated, with many countries increasing gold reserves instead of US Treasuries.

If the US cannot effectively restore global confidence in the dollar, its liquidity may decline in the future. This explains why the US has become more cautious with interest rate, QE, and QT decisions.

Historical Lessons from the US Dollar’s Movements

Over the past 50 years, the dollar index has experienced 8 major phases, each marked by significant political and economic events:

• 2008 Financial Crisis: Market panic led to a massive flight to the dollar, causing a sharp appreciation
• 2020 Pandemic Period: US aggressive easing increased supply, temporarily weakening the dollar; as the US economy stabilized, the dollar rebounded
• 2022-2023 Aggressive Rate Hikes: The Fed sharply raised interest rates, strengthening the dollar against most currencies, with the dollar index once surpassing 114
• 2024-2025 Rate Cuts Begin: The Fed starts lowering rates, reducing the dollar’s appeal, prompting capital to flow into cryptocurrencies and gold, putting downward pressure on the dollar

History shows that major economic events often trigger intense dollar volatility, but the long-term trend is influenced by multiple intertwined factors.

Will the US Dollar Really Collapse? Future Outlook

Based on current conditions, the factors influencing the dollar tend to be more bearish than bullish:

Bearish Factors:

• Escalation of trade wars and tariffs: Future conflicts may reduce international trade with the US, negatively impacting the dollar
• Continued de-dollarization: Rising gold reserves and challenges to the dollar’s reserve status
• Rate cut cycle: Lower interest rates weaken the dollar’s appeal

However, a key point cannot be ignored:

The dollar is fundamentally a “safe-haven currency.” In times of geopolitical risks or financial crises, capital will still flow back into the dollar. This is the dollar’s last line of defense.

Another often overlooked aspect is: Although the US is cutting rates, most of the major currencies (except the yen) are also lowering their interest rates! The pace and magnitude of rate cuts directly determine exchange rate strength. For example, if Europe delays rate cuts while the US accelerates them, the euro may appreciate against the dollar, causing the dollar to weaken naturally.

In summary, the US dollar index is more likely to “oscillate at high levels and gradually weaken” over the next year rather than experience a sharp collapse. The risk of a significant drop exists but is more likely to be a phased adjustment rather than a rapid crash.

What the US Dollar Trend Means for Your Investment Portfolio

Gold: The Direct Beneficiary

When the dollar weakens, gold usually benefits. Since gold is priced in dollars, a decline in the dollar reduces the cost of buying gold, boosting demand. Additionally, in a low-interest-rate environment, the opportunity cost of holding gold decreases, making it more attractive.

Stock Market: Structural Opportunities and Risks Coexist

US rate cuts tend to stimulate capital inflows into equities, especially technology and growth stocks. However, if the dollar weakens excessively, foreign investors might shift their funds to Europe, Japan, or emerging markets, reducing the attractiveness of US stocks.

Cryptocurrencies: The Rise of Inflation Hedge Assets

A weakening dollar means a decline in US dollar purchasing power. In this context, cryptocurrencies like Bitcoin, often dubbed “digital gold,” become prominent as hedges, especially during global economic turbulence, dollar depreciation, or rising inflation.

Major Currency Pairs Outlook

USD/JPY: Japan has ended ultra-low interest rates, and capital may flow back into the yen. The probability of yen appreciation and USD/JPY weakening is higher.

USD/TWD: Taiwan’s interest rates tend to follow the dollar, but domestic housing market considerations may limit rate cuts. As Taiwan is export-oriented, a lower exchange rate benefits exports. The New Taiwan dollar is expected to appreciate modestly.

EUR/USD: The euro is relatively strong now, but European economic fundamentals are weak, with high inflation and slowing growth. If the European Central Bank gradually cuts rates, the dollar may weaken slightly, but the overall impact will be limited.

Seize Volatility, Capture Opportunities

The strength or weakness of the dollar directly impacts your investment returns, asset allocation, and retirement planning. This rate cut cycle signals a change in market rhythm—capital flows will shift, and opportunities will emerge.

Instead of passively waiting for exchange rate fluctuations, it’s better to proactively position yourself. In the short term, economic data releases often trigger significant dollar movements. For example, before and after monthly CPI reports, the dollar index tends to fluctuate sharply, providing opportunities for both long and short trades.

Remember: Uncertainty itself is an investment opportunity. In an era of increasing dollar volatility, mastering the rhythm and capturing the waves is key to maximizing returns.