The US dollar interest rate cut cycle begins | 2025 exchange rate trend analysis and investment layout

In September 2024, the Federal Reserve officially kicked off the cycle of interest rate cuts. This decision not only concerns the United States but also influences the global financial markets’ pulse. According to the latest dot plot forecast, the US dollar interest rate will gradually decrease to around 3% before 2026. But the question is—does a rate cut necessarily mean the US dollar will weaken? The market reality is far more complex than it seems.

How the rate cut cycle affects the US dollar: understanding the basic logic first

A rate cut means the US dollar becomes “cheaper,” prompting capital to seek higher returns and possibly flow into risk assets. It sounds like the dollar should fall, but in reality, it also depends on what other countries do.

The US dollar is the world’s most important settlement currency, involved in foreign trade settlements, foreign exchange reserves, and cross-border investments. Therefore, the dollar’s rise or fall is actually a “relative strength comparison” across the global economic system—not about whether the dollar is absolutely strong or weak, but whether it is stronger or weaker relative to other currencies.

Based on the Federal Reserve’s policy trends, a US rate cut does not necessarily directly drag down the dollar index. If the Eurozone, Japan, and other major economies also cut rates—possibly faster or with larger cuts—the dollar could even appreciate relative to them. This is a key point many investors tend to overlook.

Four major factors determining the USD exchange rate

1. Interest rate policies— the most direct driver

When interest rates are high, the US dollar’s attractiveness skyrockets, attracting capital inflows. When rates are low, capital shifts to other markets with higher returns.

However, investors often make the mistake of focusing only on current rate hikes or cuts, ignoring expectations. The forex market is highly efficient; it won’t wait for rate cuts to be confirmed before depreciating, nor for rate hikes to be officially announced before appreciating. Smart capital has already positioned itself based on dot plot forecasts.

2. USD supply— the invisible hand of QE and QT

Quantitative easing (QE) increases the market supply of dollars, pushing down the dollar’s value. Quantitative tightening (QT) does the opposite, reducing supply and boosting the dollar.

The key is that these changes are not immediately visible. Investors must closely monitor Fed signals and react in advance.

3. Trade patterns— long-term but profound impacts

The US’s long-term trade deficit (imports > exports) affects USD supply and demand. Increased imports require more dollars for payments, pushing the dollar up; increased exports have the opposite effect. But these are usually long-term phenomena with limited short-term volatility.

4. Global confidence and the dollar’s status

The dollar’s status as the global hard currency stems from worldwide trust in the US. But this position is being challenged.

De-dollarization waves are gaining strength: the euro’s establishment, the launch of RMB crude oil futures, the rise of virtual currencies—all are eroding dollar hegemony. Since 2022, this trend has become more evident, with many countries turning to gold and losing confidence in US Treasuries.

If the US cannot effectively restore global confidence, the liquidity of the dollar may face long-term pressure. This is also why the Fed has become more cautious in its rate decisions.

50 years of USD history—how major events rewrote exchange rates

Since the 1970s, the dollar has experienced eight major cycles, each corresponding to significant economic events:

• 2008 Financial Crisis: Market panic, capital fleeing into the dollar, causing a skyrocketing dollar
• 2020 Pandemic Period: The US flooded the market with rescue funds, temporarily weakening the dollar; but as the US economy recovered rapidly, the dollar rebounded strongly
• 2022-2023 Aggressive Rate Hikes: The Fed raised rates repeatedly, making the dollar fierce, with the index once breaking through 114
• 2024-2025 Rate Cuts Begin: Capital shifts into crypto, gold, and other high-return assets, weakening the dollar’s attractiveness

History shows that policy turning points are often the biggest trading opportunities.

USD outlook for 2025—range-bound oscillation or a one-way decline?

Currently, the factors bearish for the dollar outweigh the bullish ones:

Bearish factors:

• Escalating trade policies: US tariffs against the world are rising, increasing business costs and hurting the dollar
• Accelerating de-dollarization: Countries continue to buy gold and reduce US debt holdings, putting pressure on dollar liquidity
• Other central banks also cutting rates: If global rate cuts synchronize, the dollar’s relative advantage diminishes

Why it won’t plummet sharply:

• The dollar remains a safe-haven currency: In times of geopolitical risk or financial crises, capital will still flee back to the dollar
• Relative strength determines exchange rates: Even if the USD cuts rates, other major currencies like the yen are also starting to cut, so the key is who cuts faster and more aggressively

The author’s view: over the next 12 months, the USD index is most likely to “oscillate at high levels and gradually weaken,” rather than plummet in a one-way fashion.

Which assets will benefit after the dollar weakens?

Gold— the most direct beneficiary

When the dollar weakens, gold priced in USD becomes cheaper, increasing purchasing power and demand. Plus, in a low-interest-rate environment, gold has no yield but lower opportunity costs, making it more attractive.

Crypto— a new hedge against inflation

As the dollar’s purchasing power declines, investors turn to assets that combat inflation. Bitcoin, often called “digital gold,” is especially favored during global economic turbulence and dollar depreciation.

Stock markets— structural opportunities

US 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 US stock attractiveness.

Major currencies’ one-on-one battles

USD/JPY (Dollar/Yen): Japan ends ultra-low interest rates, capital flows back, yen may appreciate, and USD/JPY will weaken

TWD/USD (Taiwan dollar/USD): Taiwan’s interest rates follow the US but have some autonomy. To control housing speculation, the TWD may not depreciate much; given Taiwan’s export orientation, a weaker TWD is beneficial. Expect limited TWD appreciation.

EUR/USD (Euro/USD): The euro remains relatively strong, but European economies are weaker and inflation remains high. If the European Central Bank slows rate cuts, the dollar will weaken slightly but not sharply.

How to seize opportunities amid volatility

USD exchange rate fluctuations are not just news topics—they directly impact investment returns, asset allocation, and retirement planning. This rate cut cycle signifies that capital flows are about to reshape, and opportunities will shift accordingly.

Short-term trading perspective: Before and after each monthly CPI release, the USD index shows clear volatility, providing windows for long or short positions.

Medium-term allocation: Follow the macro logic of “dollar weakening, gold rising, crypto recovery” for strategic layout.

Core principle: Don’t be misled by a single factor (e.g., “rate cuts = dollar must fall”). Instead, understand the complex relative strength relationships. Whenever uncertainty exists, trading opportunities arise. The key is to forecast early and position timely, rather than passively chasing or selling on rallies.

The USD interest rate trend chart reflects the real-time pulse of global capital flows—master it, and you master the market rhythm.