Will the 2025 USD trend reverse? Analyzing the interest rate cut cycle to reveal the truth behind the USD depreciation and investment opportunities

In September 2024, the Federal Reserve initiates a rate-cut cycle, a signal that spreads across global markets. Many people’s instinctive reaction is “rate cuts = weaker dollar = dollar depreciation,” but the reality is far more complex. According to the latest dot plot, the Fed plans to lower interest rates to around 3% before 2026. But how will this actually impact the USD exchange rate? How should global investors respond?

The Logic Behind the Dollar’s Depreciation: It’s Not Just About Rate Cuts

First, it’s important to understand that rate cuts do not directly mean the dollar must weaken. This is a common cognitive trap for many new investors.

When central banks cut rates, it indeed reduces the attractiveness of holding USD—capital will seek higher returns elsewhere, possibly flowing into risk assets, gold, or cryptocurrencies. But at the same time, the composition of the US Dollar Index (DXY) is not only influenced by US monetary policy; it also includes the policies of the European Central Bank, Bank of Japan, Bank of England, and other major currencies’ central banks. Simply put, if all countries are cutting rates, the currency that cuts the most or the fastest tends to weaken.

For example, if the ECB cuts rates faster than the US, the euro will strengthen relative to the dollar, making the USD appear weaker. But if all countries move in sync, the USD index may just oscillate at high levels rather than plummet. This explains why over the past 50 years, the USD index has experienced multiple reversals—it is not solely driven by US policy.

The True Drivers of USD Exchange Rate: Four Key Factors

Interest Rate Policy: Markets Are Efficient

Interest rates are the most direct source of USD attractiveness. High rates attract capital; low rates do the opposite. But there’s an important detail—markets are always forward-looking. Investors do not wait for rate cuts to happen before adjusting their positions; they act based on expectations.

This is why the dot plot is so important. The Fed’s forward guidance often influences the exchange rate months before actual policy changes. Experienced traders will position themselves in advance rather than react passively.

USD Supply: The Long-term Effects of QE and QT

Quantitative easing (QE) increases USD supply, lowering its value; quantitative tightening (QT) does the opposite. But these effects are not immediate; they manifest gradually. When the Fed continues shrinking its balance sheet (QT), USD becomes relatively scarcer, potentially providing support.

Trade Deficit and Currency Demand

The US’s long-term trade deficit (imports > exports) is a structural issue. It influences USD demand—when imports rise, more USD are needed for exchange; when imports fall, USD demand decreases. But these effects are usually long-term and do not cause sharp short-term reversals.

Global Confidence and the De-dollarization Wave

This is the most easily overlooked but deeply impactful factor. The dominance of the USD is being challenged. Since 2022, the de-dollarization trend has accelerated—countries are buying more gold instead of US Treasuries, the RMB crude oil futures have launched, cryptocurrencies are rising, and the eurozone’s existence itself is a substitute for the USD.

If the US cannot restore confidence in US debt and the dollar, the dollar’s circulation will face long-term erosion. This is the fundamental reason why the Fed has become increasingly cautious in its rate hike and cut decisions.

Historical Lessons: The Fluctuation Trajectory of the USD Exchange Rate

The past 50 years show that major economic events often mark turning points for the USD:

• 2008 Financial Crisis: Panic-driven capital flows back into the dollar, causing a sharp rise in the USD index
• 2020 Pandemic Period: Despite large-scale money printing (QE), the dollar weakened short-term, then rebounded with economic recovery
• 2022-2023 Aggressive Rate Hikes: The Fed’s consecutive large rate increases caused the dollar to strengthen against most currencies, with the index once surpassing 114
• 2024-2025 Rate Cuts Begin: USD attractiveness wanes, capital flows into gold, cryptocurrencies, and other alternative assets

These cases illustrate that: short-term fluctuations are often driven by single policies, but long-term trends are influenced by multiple intertwined factors.

How Likely Is a USD Depreciation in 2025?

Based on current analysis, the key variables influencing the USD’s future include:

Bearish Factors (Dominant):

• Escalation of trade wars: The US shifting from tariffs on China to a global tariff war will weaken USD demand in international trade
• Continued de-dollarization, with gold prices rising
• Rate cut cycle reducing USD yield attractiveness

Potential Supports:

• Rising geopolitical risks, which could boost USD as a “safe-haven” currency
• A resilient US economy, providing support for the dollar

Overall Judgment: The USD index is highly likely to oscillate at high levels and then weaken over the next 12 months, rather than sharply depreciate in a single direction. This implies trading opportunities mainly from volatility ranges rather than a unidirectional trend.

Chain Reactions of USD Depreciation on Different Asset Classes

Gold: Biggest Beneficiary

When the dollar weakens, the USD-priced gold cost drops, boosting demand. Additionally, rate cuts reduce the opportunity cost of holding gold (since yields on other assets decline), significantly increasing gold’s appeal. Gold is expected to remain strong in the future.

Cryptocurrencies and Bitcoin: Reallocating Liquidity

A weaker dollar means reduced purchasing power, prompting investors to seek assets that hedge against inflation. Bitcoin, as “digital gold,” often benefits during global economic turbulence and USD depreciation. When capital flows out of USD, cryptocurrencies tend to attract inflows.

US Stocks: Short-term Boost, Long-term Depends on Foreign Investment

Initially, rate cuts will stimulate capital inflows into stocks, especially tech and growth stocks. But if the dollar becomes too weak, foreign investors might shift to Europe, Japan, or emerging markets, reducing their holdings of US equities.

Major Currency Pair Trends

USD/JPY: The Bank of Japan has ended its ultra-low interest rate era, prompting capital to flow back into Japan and pushing the yen higher. USD/JPY is expected to weaken.

USD/TWD: Taiwan’s interest rates follow the USD, but domestic housing market considerations may limit the central bank’s rate cuts. As an export-oriented country, a weaker TWD benefits exports. The TWD’s appreciation potential is limited.

EUR/USD: The euro has been relatively strong against the dollar, but Europe’s economy faces high inflation and sluggish growth. If the ECB proceeds with gradual rate cuts, the euro may weaken mildly, but not sharply.

Investor Strategies

Short-term Opportunities: US economic data releases (like CPI, employment figures) often cause sharp USD fluctuations. Agile traders can capitalize on these short-term volatilities with long or short positions.

Medium-term Positioning: Based on expectations of the Fed’s rate cut pace, adjust asset allocations in advance, increasing holdings of gold, cryptocurrencies, and other alternative assets.

Long-term Perspective: Monitor the progress of de-dollarization and US economic fundamentals. As long as the US maintains leadership in politics, economy, and technology, the dollar’s depreciation will be limited.

Core Principle: Do not be misled by a single factor (e.g., “Fed rate cuts”). The USD trend results from multiple intertwined factors. Whether the dollar strengthens or weakens, there are always investment opportunities—if you understand the underlying logic of the fluctuations.

When uncertainty arises, opportunities follow. The shifts in the USD market in 2025 will be exactly such an era.