2025 USD Exchange Rate Fluctuation Manual | Seize Investment Opportunities During the Interest Rate Cut Cycle

The global economic compass is in the hands of the US dollar. In September 2024, the Federal Reserve began a cycle of interest rate cuts. This decision not only impacts the United States but also influences global capital flows. For investors, this market trend is both a risk and an opportunity to profit from fluctuations in the US dollar exchange rate.

According to the latest FOMC dot plot, the goal is to reduce interest rates to around 3% by 2026. However, the movement of the US dollar exchange rate does not simply follow the pace of rate cuts—it involves a complex interaction of four core factors.

The Core Logic Behind US Dollar Exchange Rate Fluctuations

How monetary policy influences the US dollar trend

U.S. interest rates are the most direct driver of the US dollar exchange rate. High interest rates attract capital inflows into dollar assets, boosting the dollar’s value; low interest rates cause capital to seek higher returns elsewhere, putting downward pressure on the dollar.

But investors often make a mistake—focusing only on current rate hikes or cuts and ignoring market expectations. The entire US dollar market reacts very quickly; it does not wait for actual rate cuts to cause the dollar to fall, nor for rate hikes to cause it to rise. Therefore, interpreting policy expectations through the dot plot is more crucial than tracking actual actions.

US dollar supply determines its strength

Quantitative easing (QE) and quantitative tightening (QT) may seem like technical details, but they directly impact the dollar’s value. During QE periods, the market is flooded with dollars, leading to a depreciation; during QT, dollar supply is restricted, and upward pressure on the dollar emerges.

Investors need to closely monitor FOMC policy signals, as the effects of such adjustments are gradual and not immediately apparent.

Trade deficits and US dollar supply and demand

The U.S. has a long-term trade deficit, which affects the international demand for the dollar. Increased imports require more dollars for payments, pushing the dollar higher; decreased exports reduce demand for dollars, leading to depreciation. However, these long-term structural factors usually take months or even years to fully reflect in exchange rates.

Global trust determines the US dollar’s status

The US dollar’s role as the global settlement currency fundamentally stems from trust in the United States. But in recent years, the wave of “de-dollarization” has risen—Euro, Renminbi, and cryptocurrencies are emerging as challengers to dollar dominance. Since 2022, many countries have lost confidence in US debt and have shifted toward gold reserves.

If the U.S. cannot restore international confidence in the dollar, its liquidity may decline, which is why the Fed has become especially cautious in its rate and QE/QT decisions.

US Dollar Index—Understanding the Global Currency Dynamics

The US dollar exchange rate is not just about a single currency pair; the Dollar Index (DXY) is a comprehensive indicator reflecting the relative strength of the dollar. It includes the weights of major currencies such as the euro, yen, and pound.

It’s important to note that the dollar index’s fluctuations are influenced not only by U.S. policy but also by the monetary policy decisions of other major economies. A unilateral rate cut by the U.S. does not necessarily directly lower the dollar index—what matters most is which other countries cut rates faster.

Historical Trends: From the Gold Standard Collapse to Modern Currency Wars

Over the past 50 years, the US dollar exchange rate has gone through eight significant phases. Several landmark events have shaped today’s landscape:

2008 Financial Crisis — Market panic triggered a massive flight into the dollar, causing a sharp appreciation. This crisis proved that during global economic turmoil, the dollar remains the ultimate safe-haven asset.

2020 Pandemic Shock — The U.S. government’s large-scale stimulus injected liquidity, temporarily weakening the dollar. But as the U.S. economy recovered rapidly, the dollar rebounded.

2022-2023 Aggressive Rate Hike Cycle — The Fed raised interest rates quickly, pushing the dollar to its limits against many currencies, with the dollar index once surpassing 114, a historical high.

2024-2025 Rate Cut Phase — The Fed begins to adjust policies, diminishing the dollar’s attractiveness, with capital shifting toward cryptocurrencies, gold, and other alternative assets.

Forecast for the US dollar exchange rate in 2025

Based on current conditions, key factors influencing the dollar’s future include:

Escalation of trade policies — The U.S. adopts more aggressive trade policies, increasing costs for multinational companies operating in the U.S., which is a long-term bearish factor for the dollar.

Accelerated de-dollarization — Countries continue to reduce holdings of U.S. Treasuries and increase gold reserves, weakening demand for the dollar.

Normalization of geopolitical risks — Despite many bearish factors, any new geopolitical crisis or financial turmoil could still drive capital back into the dollar as a safe-haven asset.

Progress of rival currencies’ rate cuts — This is the most underestimated variable. Among the currencies in the dollar index, except for the yen, others have already started cutting rates. Who cuts faster and more aggressively will directly determine the strength of the exchange rate. If the European Central Bank remains on hold while the Fed continues to cut rates, the euro may appreciate against the dollar, pushing the dollar index lower.

Overall judgment: The US dollar exchange rate in the next year is likely to “oscillate at high levels and gradually weaken,” rather than depreciate sharply in one direction.

How US dollar movements impact various asset classes

Gold Market

A weakening dollar directly benefits gold. Since gold is priced in dollars, a depreciation reduces the cost of buying gold, increasing demand. Additionally, in a rate-cut environment, gold bears no interest loss, and the opportunity cost decreases, making it more attractive.

Stock Market

Rate cuts in the U.S. typically stimulate the stock market, especially technology and growth stocks. However, if the dollar becomes too weak and triggers foreign capital outflows, funds may shift to Europe, Japan, or emerging markets, weakening the appeal of U.S. equities.

Cryptocurrency Ecosystem

A weaker dollar means reduced purchasing power, which generally benefits the crypto market. Bitcoin, as “digital gold,” is especially viewed as a safe-haven asset and wealth preservation tool during global economic instability, dollar depreciation, or rising inflation.

Performance of Various Currencies

USD/JPY — Japan is ending its ultra-low interest rate era, with capital flowing back into Japan, strengthening the yen. USD/JPY will face depreciation pressure.

TWD/USD — Taiwan’s interest rates usually follow the U.S., but domestic housing market regulation limits rate cuts. Plus, Taiwan’s export-driven economy benefits from a lower exchange rate. Expect the TWD to appreciate moderately, with limited range.

EUR/USD — The euro has recently been relatively strong, but Europe’s economy remains weak, and inflation is still high. If the European Central Bank gradually cuts rates while the Fed accelerates rate cuts, the dollar may appreciate further.

How to profit from US dollar exchange rate fluctuations

Master the short-term trading rhythm

Before and after monthly CPI releases, the dollar index experiences the most volatility—this is the golden window for short-term trading. Investors can analyze economic data expectations and position themselves for long or short trades accordingly.

Long-term allocation mindset

A rate cut cycle signals a shift in market rhythm—capital flows will change, and opportunities will shift as well. Instead of passively waiting for exchange rate movements, it’s better to identify trends early and diversify assets.

Core principles

Uncertainty equals opportunity. As long as market expectations diverge and policy variables exist, the dollar exchange rate will continue to fluctuate, which is the source of profit for investors. The key is not to predict absolute trends but to understand the logic behind the movements and adjust positions accordingly.

Forecasting the dollar’s trend requires multi-dimensional thinking—consider interest rate policies, geopolitical risks, U.S. economic conditions, and global confidence. Mastering these logics will help you seize real investment opportunities amid dollar fluctuations in 2025.