Dollar Investment Map During the Rate Cut Cycle | Three Major Trends in USD Exchange Rate and Trading Layout Guide

Does a rate cut really mean the dollar will fall? Not necessarily.

By the end of 2024, the Federal Reserve is expected to start a rate-cutting cycle, and the market generally believes the dollar will depreciate. But this is the easiest trap to fall into. The reality is much more complex — the dollar’s movement depends on “who cuts faster, who cuts more,” rather than the mere fact of rate cuts themselves.

According to the latest FOMC dot plot, the goal is to bring interest rates down to around 3% before 2026. But this does not mean the dollar will weaken unilaterally. Investors need to understand that the dollar market is highly efficient; prices always lead expected changes.

The Three Main Logic Drivers of USD Exchange Rate

Logic One: Interest rate differentials are the direct driver of exchange rates

The core logic of USD exchange rate is simple — the higher the interest rate, the more valuable the currency.

A rate cut does not necessarily mean the dollar will weaken. When the Fed cuts rates, what truly influences the dollar’s strength is the relative interest rates. For example:

• If the US cuts rates but Europe does not, maintaining higher European interest rates, the euro will appreciate relative to the dollar, which may weaken the dollar
• If both the US and Europe cut rates simultaneously, but the US cuts more slowly, the dollar may still remain relatively strong

This also explains why the USD index did not significantly weaken by the end of 2024 — because global central banks are watching each other, and the relative interest rate differentials have not experienced a major reversal.

Logic Two: Liquidity changes determine medium-term trends

Quantitative easing (QE) and quantitative tightening (QT) directly impact the USD supply. When the Fed implements QT, the amount of USD in the market decreases, which can boost the dollar’s value; QE has the opposite effect.

However, this impact does not materialize immediately. The market begins to react to policy change expectations 2-3 months in advance. Some savvy investors have already started long positions on the dollar before the Fed announced QT.

Logic Three: Credit and the global landscape are long-term supports

The fundamental reason the dollar has become the global settlement currency is trust and hegemonic status. But this advantage faces three major challenges:

1. De-dollarization wave: The EU promotes euro internationalization, China launches RMB crude oil futures, emerging markets shift towards gold reserves
2. US credit issues: Since abandoning the gold standard, US debt has continued to swell, raising concerns about the long-term purchasing power of the dollar
3. Aggressive trade policies: The US initiates tariff wars globally, increasing business costs and potentially weakening dollar demand

Therefore, although short-term rate cuts may not necessarily lead to a weaker dollar, in the long run, if the de-dollarization trend continues unabated, the dollar’s liquidity could decline.

Four Key Cycles in the USD Historical Trends

Over the past 50 years, the dollar has gone through eight significant phases, with the most noteworthy being:

Insight: The dollar does not move solely with interest rates. Geopolitical risks and financial crises still cause capital to flow back into USD. It remains fundamentally the world’s most important safe-haven asset.

Probabilistic Outlook for the USD in the Next Year

Considering the current situation, the most probable trend for the USD index in the next 12 months is “range-bound with gradual weakening,” rather than a one-way plunge.

Three key observations support this:

Bearish factors dominate:

• The Fed enters a rate-cutting cycle, reducing its attractiveness
• The de-dollarization trend globally continues, with gold prices rising
• US trade policies become more aggressive, potentially damaging dollar demand

But risks remain:

• Geopolitical conflicts are frequent; if escalated, capital will still seek safety in USD
• Other currencies besides JPY in the USD index are also cutting rates, so relative strength depends on the pace of rate cuts

Practical Analysis of Various Currencies Against the USD

USD/JPY

Japan has ended its ultra-low interest rate era, and capital is flowing back into the Japanese market. This means upward pressure on the yen increases, and USD/JPY risks depreciation.

If the Fed cuts rates faster than the Bank of Japan raises them, this trend will become more pronounced.

USD/TWD

Taiwan’s policy stance is complex — wanting to cut rates to support the economy, but also needing high rates to cool the housing market. As an export-oriented country, a stronger TWD (i.e., lower USD/TWD) benefits exports.

It is estimated that during the Fed’s rate-cutting cycle, TWD will appreciate (rise against USD), but the extent will be limited (perhaps 3-5%), because Taiwan also needs to adjust accordingly.

EUR/USD

Europe’s economy is relatively weak, with inflation still high, but the European Central Bank (ECB) may proceed cautiously with rate cuts. This means European interest rates are unlikely to fall too fast, and EUR/USD will have limited depreciation.

The dollar will only weaken slightly against Europe, not experiencing a sharp decline.

How USD Trends Affect Other Assets?

Gold: Biggest beneficiary of a weakening dollar

Gold is priced in USD. When the dollar depreciates, the cost of buying gold in other currencies drops, increasing demand. Simultaneously, rate cuts reduce the opportunity cost of holding gold (which bears no interest), creating a double positive.

Forecast: During the Fed’s rate-cut cycle, gold still has room to rise.

Stock Market: Needs the dollar not to be too weak

The Fed’s rate cuts do encourage capital inflows into stocks, especially tech stocks. But if the dollar becomes too weak, international capital may shift to Europe, Japan, or emerging markets, weakening the attraction of US equities.

Cryptocurrency: Moves inversely to the dollar

A weaker dollar means reduced purchasing power of USD. Investors seek assets that hedge against inflation, and cryptocurrencies (especially Bitcoin as “digital gold”) benefit. During periods of global economic turbulence, this logic is even stronger.

How Investors Can Capture Opportunities from USD Fluctuations?

Short-term strategy: Focus on data releases

Monthly CPI reports, employment data, FOMC meetings all trigger short-term volatility in the USD index. These are opportunities for quick long or short trades.

Medium-term strategy: Track interest rate differentials

Monitor the interest rate policies and expectations of the US and other major central banks. The faster and more aggressive the rate cuts, the more likely the currency will weaken.

Long-term strategy: The dollar will not collapse

Despite the de-dollarization trend, the USD’s global dominance will not be shaken in the short term. The US economy, military, and technological advantages still hold.

Core principle: Whenever there is uncertainty, there is opportunity. The key is to understand the three layers behind USD movement — interest rate differentials, liquidity, and long-term credit — rather than simply assuming “rate cuts = dollar falls.”

The rate-cut cycle has just begun; the real volatility is yet to come. Early positioning is essential to profit from the trend.