The 2025 US dollar trend diverges: which currency pairs are facing reshaping?

Basic Understanding of the US Dollar Exchange Rate

The exchange rate refers to the ratio at which one country’s currency can be exchanged for another’s. Taking EUR/USD as an example, this number represents how many US dollars are needed to buy one euro. When EUR/USD rises from 1.04 to 1.09, it indicates the euro is appreciating and the dollar is depreciating; conversely, if it falls to 0.88, the euro depreciates and the dollar appreciates.

The US Dollar Index is a key indicator of the overall strength of the dollar, composed of a weighted average of the dollar’s exchange rates against six major currencies: euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. A higher or lower index directly reflects the dollar’s relative strength against these currencies. It is important to note that Federal Reserve policy adjustments do not necessarily directly correlate with movements in the dollar index—this also depends on whether these other central banks take similar measures.

Current Dilemma and Outlook for the US Dollar Index

The US Dollar Index has fallen for five consecutive days and is currently hovering around its lows since November (about 103.45), recently even breaking below the 200-day moving average, signaling a clear bearish technical signal.

In March, US employment data fell short of expectations, reinforcing market expectations of multiple rate cuts by the Federal Reserve. This led to declining US Treasury yields, weakening the dollar’s appeal for capital. If the Fed indeed begins a rate-cutting cycle, the likelihood of a dollar weakening will significantly increase.

Although a short-term rebound is possible, the overall bearish trend remains dominant under oversold conditions. If economic data continues to weaken, the dollar index may continue to test lows within the year, with support possibly falling below 102.00.

Historical Cycles of the US Dollar

Since the collapse of the Bretton Woods system in 1971, the dollar index has experienced eight typical fluctuation phases:

1971-1980 (Decline): Nixon announced the end of the gold standard, leading to dollar oversupply, compounded by oil crises and high inflation, pushing the dollar below 90.

1980-1985 (Rise): Fed Chair Volcker aggressively raised rates to 20%, maintaining high levels of 8-10%, pushing the dollar index to a historic peak, marking the end of the dollar bull market.

1985-1995 (Decline): The US faced “dual deficits” (fiscal and trade), leading to a prolonged bear market for the dollar.

1995-2002 (Rise): Clinton’s administration, booming internet industry, and capital inflows pushed the dollar index above 120.

2002-2010 (Decline): Dot-com bubble burst, 9/11, prolonged quantitative easing, culminating in the 2008 financial crisis, with the dollar falling near 60.

2011-2020 early (Rise): European debt crisis, Chinese stock market crash, US relative stability, Fed rate hikes, and dollar strength.

2020 early - 2022 early (Decline): Pandemic shock, US zero interest rates, massive money printing, causing the dollar to plummet and inflation to spiral out of control.

2022 early - 2024 end (Decline): Surging inflation prompted aggressive Fed rate hikes to 25-year highs and QT measures, suppressing inflation but challenging dollar confidence again.

Major Currency Pair Outlook for 2025

EUR/USD: Euro expected to continue rising

The euro generally moves inversely to the dollar index. If the Fed cuts rates while Europe’s economy continues to improve, the euro will receive double support. Currently, EUR/USD has risen to 1.0835, showing a sustained upward trend. If it stabilizes here, it may challenge the psychological level of 1.0900. Technically, previous highs and trendlines could serve as strong support, with 1.0900 being a key resistance. Breaking through this level could open larger upside potential.

GBP/USD: Pound maintains sideways upward trend

The pound’s movement is largely aligned with the euro. Market expectations suggest the Bank of England will cut rates more slowly than the Fed, providing relative support for the pound. If the BoE adopts a more cautious rate-cutting approach, GBP/USD is likely to stay within 1.25-1.35, driven mainly by policy divergence and risk aversion. Further divergence in economic paths could push it above 1.40, but political risks and liquidity shocks should be watched.

USD/CNH: Renminbi under pressure, dollar may strengthen

The USD/CNY exchange rate is influenced by policy differences between the US and China. If the Fed remains hawkish while China’s growth slows, the renminbi will face pressure, and the dollar may rise. Central bank policies and market guidance will also have long-term effects. Technically, USD is trading in a range of 7.2300-7.2600 with little short-term breakout momentum. A break below 7.2260 with oversold signals could offer short-term buying opportunities.

USD/JPY: Yen appreciation expected to strengthen

USD/JPY is the most traded currency pair globally. Japan’s January basic wage growth of 3.1% (highest in 32 years) reflects a shift from long-term low inflation. Rising wages and inflation pressures may prompt the Bank of Japan to adjust policies in the future. The outlook for 2025 suggests downward pressure on USD/JPY, with Fed rate cuts and Japan’s economic recovery as main drivers. If it falls below 146.90, further testing of lows is likely; a break above 150.0 is needed to reverse the downtrend.

AUD/USD: Australian dollar supported by economic data

Recent Australian economic data are strong—Q4 GDP grew 0.6% quarter-on-quarter and 1.3% year-on-year, both exceeding expectations; January trade surplus reached 56.2 billion. The Reserve Bank of Australia remains cautious, with low likelihood of rate cuts, implying relatively hawkish monetary policy that supports the AUD. Despite potential dollar weakness from Fed easing, Australia’s economic resilience and cautious stance will underpin AUD/USD gains.

2025 US Dollar Trading Strategy Layers

Short-term (Q1-Q2): Range trading opportunities

Bullish scenario: Escalating geopolitical conflicts may boost safe-haven demand, and better-than-expected US economic data could delay rate cut expectations, triggering dollar rebounds.

Bearish scenario: Continuous rate cuts by the Fed and improved European policies could weaken the dollar, and weak Treasury auctions might even trigger dollar credit risks.

Aggressive traders can buy low and sell high within the DXY 95-100 range, using MACD, Fibonacci, and other technical indicators to catch reversal points. Conservative investors should mainly wait and see, awaiting clearer Fed policy signals.

Mid-to-long-term (Post-Q3): Gradual shift to non-US assets

As the Fed deepens rate cuts and US Treasury yields narrow, capital will flow into high-growth emerging markets or recovering Eurozone. If de-dollarization accelerates globally, the dollar’s reserve currency status will weaken marginally.

The strategy is to gradually reduce dollar long positions and allocate to reasonably valued non-US currencies (yen, AUD) or commodities (gold, copper).

In 2025, dollar trading will become more data-driven and event-sensitive; flexibility and discipline are key to capturing exchange rate volatility profits.