## Will the US dollar depreciate in 2025? Understanding the exchange rate secrets during the easing cycle

The heartbeat of the global economy is driven by the rhythm of the US dollar. In September 2024, the Federal Reserve initiated a rate-cutting cycle, quietly reshaping the investment landscape. Many people's first reaction is "rate cuts = weaker dollar," but the reality is more complex.

**The impact of dollar depreciation** far exceeds expectations—it influences gold, cryptocurrencies, the stock market, and even your foreign currency assets. According to the Fed's latest forecast, the US dollar interest rate target is expected to fall to around 3% before 2026. So, the question is: will the dollar fall or rise? How can investors profit from this changing environment?

## Don't just look at interest rates; the underlying logic of the USD exchange rate is the key

### What is the exchange rate? A straightforward explanation

The USD exchange rate is the "market price" of the dollar against other currencies. For example, EUR/USD=1.04 means $1.04 can buy 1 euro. If this number rises to 1.09, it indicates the euro is appreciating and the dollar is depreciating; if it drops to 0.88, the dollar is appreciating.

A more comprehensive indicator is the **US Dollar Index**, which measures the dollar's overall strength against a basket of currencies. But there's an often overlooked point— the dollar index is influenced not only by US policies but also by the monetary policies of major economies like the Eurozone, Japan, and the UK. So, **a unilateral rate cut by the US does not guarantee a decline in the dollar index; it depends on how other countries respond**.

### The four major drivers are rewriting the dollar trend

**Interest rate policy is the primary driver**

High interest rates = strong dollar attractiveness, attracting capital; low interest rates = cheaper money, capital fleeing to more lucrative markets. But what truly determines exchange rate movements is not the current interest rate level but **market expectations of future interest rates**. The dollar market is highly efficient and reacts in advance— it doesn't wait for rate cuts to be confirmed before weakening; it has already priced it in.

**The supply of dollars (QE vs QT) is the second driver**

Quantitative easing (QE) involves the Fed printing money, putting downward pressure on the dollar; quantitative tightening (QT) involves tightening liquidity, potentially strengthening the dollar. This is why investors closely monitor the Fed's every move.

**Trade deficits are the third driver**

The US has long imported more than it exports. Increased imports = more dollars needed for payments = dollar appreciation; increased exports = decreased dollar demand = dollar depreciation. But these effects are usually long-term and not immediate.

**Global trust is the fourth and deepest driver**

The dollar's dominance is ultimately rooted in global trust in the US. But this trust is being tested— the wave of de-dollarization is sweeping the world, with the euro, renminbi, and even Bitcoin challenging US dollar hegemony. Since 2022, confidence in the dollar has declined, with countries increasing gold holdings. **If US policies cannot restore this trust, dollar liquidity may gradually decrease**.

## A 50-year history of the dollar: from the gold standard to de-dollarization

Looking at the 50-year trend of the dollar index, several key points are worth pondering:

- **2008 Financial Crisis**: Global panic, capital flight to safe assets, leading to a sharp dollar appreciation
- **2020 COVID-19 Pandemic**: US government stimulus measures flooded the market, temporarily weakening the dollar, but later rebounded strongly due to economic recovery
- **2022-2023 aggressive rate hikes**: The Fed raised rates by 75 basis points monthly at times, making the dollar dominant against major currencies, with the index surpassing 114, a historic high
- **2024-2025 rate cut cycle begins**: US dollar appeal wanes, capital flows into cryptocurrencies, gold, and other inflation-hedging assets

## What will happen to the dollar in the next 12 months? The latest market outlook

Based on current conditions, the bearish factors for the dollar are accumulating:

**Trade policies are heating up**

The US is no longer just "fighting" China; a global tariff war is unfolding. This increases costs for doing business with the US, prompting companies to shift to other markets, which is unfavorable for the dollar.

**De-dollarization trend accelerates**

Central banks worldwide continue to increase gold reserves and reduce dollar exposure. This is a long-term trend and irreversible.

**But don't forget geopolitical risks**

Ongoing turmoil in Ukraine and the Middle East means that if a new financial crisis erupts, capital will first flee back to the dollar— because fundamentally, **the dollar remains the world's largest safe-haven currency**.

**The key comparative logic**

The dollar is starting to cut rates, but the constituent currencies of the dollar index (except the yen) are also lowering rates. **Who cuts faster, who cuts more, directly determines the relative strength of the exchange rate**. For example, if the European Central Bank gradually cuts rates while the US aggressively lowers them, the euro will naturally appreciate against the dollar.

**Overall judgment**: The dollar index is highly likely to "oscillate at high levels and gradually weaken" over the next year, rather than a one-sided plunge. The effects of dollar depreciation will gradually manifest but won't be abrupt.

## Which assets are affected by the dollar trend?

**Gold benefits the most**

A weaker dollar = lower gold costs = increased gold buying. Plus, rate cuts reduce the opportunity cost of holding gold (which pays no interest), jointly boosting gold prices.

**Stock market performance varies**

Short-term rate cuts stimulate capital inflow into US stocks, especially tech and growth stocks. But if the dollar becomes too weak, foreign investors might shift to Europe, Japan, or emerging markets, reducing the attractiveness of US stocks.

**Cryptocurrencies' safe-haven role is activated**

Dollar weakening → decline in dollar purchasing power → capital seeking inflation-hedging assets → Bitcoin as "digital gold" becomes popular. In times of high economic uncertainty, cryptocurrencies are becoming a new favorite for capital.

**Specific variables for major currency pairs**

**USD/JPY (US dollar vs. Japanese yen)**: Japan has ended its ultra-low interest rate era; yen capital may flow back to Japan, pushing the yen higher, putting downward pressure on USD/JPY.

**TWD/USD (Taiwan dollar vs. US dollar)**: Taiwan's interest rates follow the US, but due to housing market controls and export-driven economy, the TWD's appreciation is expected to be limited.

**EUR/USD (Euro vs. US dollar)**: The euro is relatively strong, but European economic concerns (high inflation, weak growth) persist. If the ECB gradually cuts rates, the dollar will weaken further, but the move won't be extreme.

## How to position for the bottom during the dollar depreciation cycle?

Instead of passively waiting for exchange rate fluctuations, it’s better to identify the rhythm early and take proactive action.

**Three key points for short-term trading**

Before and after each CPI release, the dollar index tends to fluctuate sharply. FOMC meetings are also critical timing points. Short-term traders can focus on these events to make tactical trades and seize rapid volatility opportunities.

**Core ideas for medium- to long-term allocation**

Under dollar depreciation, assets like gold, cryptocurrencies, and emerging market currencies are entering an accumulation phase. Uncertainty itself is a source of opportunity— as long as the market is still betting, there will always be arbitrage opportunities.

Remember one principle: **Rate cuts are not simply a bearish signal but a reshuffle of asset allocation.** Investors who understand liquidity turning points, monetary policy expectations, and the cumulative effects of geopolitical risks can truly profit from this dollar depreciation cycle.