The new 2025 USD cycle begins | Exchange rate fluctuations and strategic opportunities amid the interest rate cut wave

The US dollar has officially entered a new era. The rate-cutting cycle starting in September 2024 is quietly reshaping the map of global capital flows. As the world’s primary settlement currency, every move of the dollar influences the foreign exchange market, commodities, stocks, and crypto assets. The latest forecasts indicate that the Federal Reserve plans to cut interest rates to around 3% by 2026, signaling a profound market restructuring underway.

What is the underlying logic behind the USD exchange rate trend?

First, it’s essential to understand that the USD exchange rate is fundamentally a comparison game—it measures the relative strength of the dollar against other currencies.

Take EUR/USD as an example. If the current rate is 1.04, it means 1 USD equals 0.96 euros; if it rises to 1.09, it indicates the euro has appreciated and the dollar has depreciated; if it drops to 0.88, the dollar has appreciated.

The USD index tracks the overall performance of the dollar against a basket of major currencies (including euro, yen, pound, etc.). But here’s a key point: US rate cuts do not necessarily lead directly to a decline in the USD index. Because the monetary policies and economic conditions of other countries also influence their currencies. In other words, who cuts faster and by how much ultimately determines the exchange rate outcome.

The four main drivers of USD exchange rate movements

Interest rate policy: the core of market pricing

Interest rates are the most direct attraction for the dollar. In a high-interest environment, capital seeking returns flows into USD assets; in a low-interest period, capital outflows seek higher yields elsewhere.

But seasoned investors know a trick: the market always prices in expectations in advance. Don’t wait for the Fed to confirm rate cuts before selling dollars, nor buy only after rate hikes are confirmed. The Fed’s dot plot can help anticipate shifts in expectations, which often present trading opportunities.

The invisible hand of money supply: QE and QT

Quantitative easing (QE) increases the supply of dollars in the market, lowering its value; quantitative tightening (QT) reduces supply, pushing the dollar higher. However, these effects also have time lags—there’s often a delay of weeks or even months between policy announcements and market reactions.

The long-term impact of trade account imbalances

The US has maintained a long-term trade deficit (imports exceeding exports). While this doesn’t directly impact the exchange rate in the short term, over the long run it can suppress dollar demand. Currently, the US is implementing aggressive tariffs globally, and future trade relations may see US companies reduce trade, which constitutes a medium-term bearish factor for the dollar.

Credit and status: the dollar’s greatest assets

The dollar’s dominance as the global settlement currency fundamentally stems from the US’s economic, political, and military strength. But in recent years, this position faces three challenges: eurozone integration, the rise of the renminbi crude oil futures, and the emergence of virtual currencies.

Since 2022, the de-dollarization wave has accelerated—countries are shifting towards buying gold and other assets to replace dollar reserves. If the US cannot rebuild confidence, dollar liquidity will face long-term pressure. This also explains why the Fed has become more cautious with monetary policy.

Lessons from fifty years of USD exchange rate trends

Looking back at half a century of the USD index performance, every major fluctuation has been accompanied by significant events:

• 2008 Financial Crisis: Panic-driven capital flight, USD index soared
• 2020 Pandemic Shock: US stimulus and money printing caused short-term depreciation, later rebounded as the economy led recovery
• 2022-2023 Aggressive Rate Hikes: The Fed raised rates sharply, pushing the USD index above 114, a historical high
• 2024-2025 Shift to Easing: Rate cuts begin, capital flows into crypto and gold as alternative assets

History shows that geopolitical crises still make the dollar the ultimate safe haven. Even if fundamentals are bearish, sudden security events can instantly reverse exchange rate trends.

USD exchange rate forecast for 2025: oscillating at high levels then gradually weakening

Based on current conditions, several dimensions are worth monitoring:

Bearish factors dominate. The de-dollarization trend continues, gold remains attractive, and US trade policies shift towards confrontation.

But declines won’t happen overnight. Rate cuts are a fact, but other major currencies (euro, pound, AUD, etc.) are also cutting rates—what matters is the relative speed. If the European Central Bank holds steady while the Fed cuts quickly, the euro will appreciate; if all countries cut simultaneously, the dollar’s decline will be significantly restrained.

Geopolitics is a black swan. Any outbreak of international conflict or financial crisis will cause capital to flow back into the dollar immediately.

Author’s view: The most likely trend for the USD index in the next 12 months is “oscillation within a high range, gradually weakening,” rather than a one-way plunge.

How USD exchange rate movements impact various assets

Gold: the most direct beneficiary

USD depreciation → lower gold purchase costs → increased demand. In a rate-cut environment, gold’s opportunity cost (the interest foregone by holding gold) also declines, providing a double benefit.

Stock market: competitors for capital flow

Fed rate cuts will directly stimulate stock markets, especially benefiting tech stocks. But if the dollar becomes too weak, foreign investors may shift to Europe, Japan, or emerging markets seeking higher returns, which could weaken US stock attractiveness.

Crypto: a new favorite for inflation hedging

USD depreciation means a decline in fiat currency purchasing power, making crypto assets more attractive as an inflation hedge. Bitcoin, as “digital gold,” is often viewed as a store of value during global economic turbulence and dollar weakness.

Exchange rate battles: subtle changes among major currencies

USD/JPY: The Bank of Japan is ending its ultra-low interest rate era, which may lead to yen repatriation and yen appreciation. Expect USD/JPY to weaken.

TWD/USD: Taiwan’s interest rates follow the US, but domestic policies (like housing restrictions) and export-driven economy will limit TWD appreciation. Expect modest TWD appreciation with limited gains.

EUR/USD: The euro is relatively stronger than the dollar, but Europe’s economy remains weak with high inflation. If the ECB cuts rates gradually, the dollar will weaken but not sharply.

Capturing trading opportunities amid uncertainty

This rate-cutting cycle is not just headlines; it directly impacts investment returns, asset allocation, and even retirement planning. Instead of passively waiting, it’s better to actively position.

Short-term traders’ opportunities: Before and after monthly CPI releases, the USD index often experiences volatile swings—ideal windows for long and short trades. Economic data, Fed speeches, geopolitical events—any surprises can trigger rapid reactions.

Medium-term investors’ direction: The downtrend of the USD index is established, but volatility will be high. Consider positioning for shorting the dollar and going long on gold and select emerging market currencies on rallies.

Core principle: Whenever uncertainty exists, trading opportunities exist. The key is learning to identify signals and seize opportunities at every turning point in the USD exchange rate.