2025 USD Investment Layout Guide | Interpreting the Four Main Drivers Behind the USD Trend

In September 2024, the Federal Reserve initiated a rate-cut cycle, a decision that will profoundly change global capital flows. Simply put, lower interest rates mean decreased attractiveness of the US dollar, prompting funds to seek riskier assets, and the dollar faces downward pressure. However, this shift in the dollar’s trend presents both risks and opportunities.

As the world’s primary settlement currency, the US dollar’s interest rate policies influence the pulse of the entire global financial market. According to the latest dot plot forecasts, the Federal Reserve aims to reduce interest rates to around 3% by 2026. For investors, the key question is: Will the dollar rise or fall in the future? How can one seize opportunities amid the changing dollar trend?

The Four Core Drivers of USD Exchange Rate Fluctuations

To predict the dollar’s movement, it is essential to understand the key factors influencing exchange rates.

Interest Rate Policy as the Direct Driver of USD Trends

When interest rates are high, the dollar’s attractiveness increases, leading to large capital inflows; when rates are low, funds shift to more attractive markets. However, investors often fall into a misconception—focusing only on current rate hikes or cuts while ignoring market expectation pricing.

In reality, the dollar’s trend reacts before policies are finalized; markets tend to price in expectations in advance. Therefore, tracking the Fed’s dot plot forecasts is more important than focusing solely on actual decisions.

The Long-term Impact of USD Supply and Demand

Quantitative easing (QE) and quantitative tightening (QT) directly alter the amount of USD in the market. QE increases USD supply, pushing down its value; QT reduces supply, supporting USD appreciation. However, these effects often lag behind, requiring investors to closely monitor Fed policy signals.

International Trade Patterns Determine USD Supply and Demand

The US has maintained a long-term trade deficit (imports > exports), affecting USD supply and demand balance. Increased imports require more USD payments, pushing the dollar higher; increased exports reduce USD demand, leading to dollar depreciation. These factors typically influence the medium to long term and are less observable in the short term.

The Global Credit Foundation of the USD Is Facing Challenges

The USD’s dominance stems from the US’s strong economic, political, and military power. However, recent waves of “de-dollarization” are rising—expanding Eurozone, internationalization of the RMB, rise of virtual currencies, and countries increasing gold holdings. Since 2022, US creditworthiness has been damaged, prompting many nations to reduce USD exposure.

This implies that if the US cannot effectively restore international confidence, USD liquidity may face downside risks. This also explains why the Fed has become more cautious in its rate and quantitative policy decisions.

Historical Context of USD Trends

Over the past 50 years, the USD index has experienced eight major phases, each linked to significant economic events:

• 2008 Financial Crisis: Market panic triggered a flight to the dollar, sharply appreciating the USD
• 2020 Pandemic Shock: Massive US stimulus lowered the dollar, followed by economic recovery pushing the USD higher
• 2022-2023 Rate Hike Cycle: The Fed aggressively raised rates, with the dollar breaking through the 114 level
• 2024-2025 Rate Cut Initiation: Capital flows into cryptocurrencies and gold, putting pressure on the dollar

USD Outlook: Higher Range Fluctuations Likely to Gradually Weaken

Based on current conditions, multiple factors point to the future direction of the dollar:

Bearish factors outweigh bullish ones:

• US trade policies are becoming more aggressive, global tariffs are rising, and US-based companies are reducing international trade
• De-dollarization continues, with strong international gold demand
• Major currencies are also entering rate-cut cycles, weakening relative competitive advantages

However, risk aversion remains a key variable: Geopolitical risks frequently erupt; in the event of a financial crisis or escalation of conflicts, capital will quickly flow back into the dollar. The dollar’s nature as a “safe-haven currency” will not change.

Key observation—USD’s relative strength: A rate cut by the Fed is only superficial; what determines USD movement is the relative pace and magnitude of rate cuts compared to other currencies. If the European Central Bank cuts rates more slowly while the Fed accelerates, the euro may appreciate, and the dollar will weaken accordingly.

Author’s view: Over the next year, the USD index is more likely to fluctuate within a high range and gradually weaken rather than experience a sharp decline.

Chain Reactions of USD Trend Changes on Different Assets

Gold: Weak USD Means Strong Gold

Gold priced in USD will see increased demand as the dollar depreciates, lowering the purchase cost of gold. Additionally, in a rate-cut environment, the disadvantage of gold’s non-yielding nature diminishes, boosting its appeal as a store of value.

Stock Markets: Abundant Liquidity but Limited Attraction

Lower interest rates encourage capital inflows into stocks, especially tech and growth stocks. However, if the dollar weakens excessively, international capital may shift to Europe, Japan, or emerging markets, reducing the relative attractiveness of US equities.

Crypto: USD Depreciation Boosts Digital Assets

A weakening dollar reduces purchasing power, prompting funds to seek assets that hedge against inflation. Bitcoin, as “digital gold,” is often favored during global economic turbulence and USD depreciation.

USD Trends for Major Currency Pairs

USD/JPY (Dollar-Yen) Japan is ending its ultra-low interest rate environment, prompting capital to flow back into Japan, increasing yen appreciation pressure. USD/JPY is expected to face downward pressure.

USD/TWD (Dollar-Taiwan Dollar) Taiwan’s interest rates follow the US but with limited scope; domestic policies (like housing market controls) make rate cuts unlikely. As Taiwan is export-oriented, a low exchange rate benefits exports. The NT dollar is expected to appreciate moderately.

EUR/USD (Euro-Dollar) The euro is relatively resilient but Europe’s economy remains weak, with high inflation and sluggish growth. If the ECB slows rate cuts, the USD’s decline will be limited.

Practical Investment Strategies: Seize Opportunities in USD Fluctuations

USD trends are not just macro news—they directly impact investment returns and asset allocation. During this rate-cut cycle, capital flows will undergo fundamental shifts.

Short-term Trading Opportunities Before and after monthly CPI releases, the USD index often exhibits sharp volatility. Short-term traders can capitalize on these high-volatility periods for long and short positions.

Medium-Long Term Allocation Approach Avoid passive waiting for exchange rate fluctuations; instead, plan ahead and follow the trend. Adjust asset allocation based on USD outlook—increase exposure to gold and cryptocurrencies, and moderately reduce reliance on USD assets.

Core Investment Principles Whenever uncertainty exists, trading opportunities arise. The key is to grasp information release timings, conduct in-depth analysis, control risk exposure, and identify value at every turning point in the USD trend.