The US dollar enters an interest rate cut cycle | 2025 US dollar decline risks and investment strategies

In September 2024, the Federal Reserve announced a rate cut, marking a new turning point in the global financial markets. This decision not only impacts the United States but also influences the entire global economic pulse—since the US dollar, as the international settlement currency, has its interest rate movements directly determine capital flows and investors’ return opportunities.

According to the latest Fed forecasts, the USD interest rate target will fall to around 3% before 2026. Against this backdrop, many investors are beginning to ponder: Will the US dollar rise or fall? What is the underlying logic? How can one seize trading opportunities within this context?

Rate Cut Cycle Begins: Why Is the US Dollar Facing Downward Pressure?

Basic logic driven by interest rates

Interest rates are the most direct factor affecting the USD exchange rate. When interest rates decline, the attractiveness of the dollar weakens, and capital starts flowing into other higher-yield assets—cryptocurrencies, gold, stocks, etc. This means an increase in USD supply, decreased demand, and ultimately a depreciation of the dollar.

However, many investors make a common mistake: focusing only on rate cuts themselves, ignoring market expectations. In reality, the USD exchange rate market has already begun pricing in signals from the Fed the moment they are issued, and will not wait until the rate cut is actually implemented to react. Therefore, investors need to pay attention to the expected direction of interest rate changes, not just confirmed policies.

Dual impact of USD supply and quantitative tightening

The Fed’s quantitative easing (QE) and quantitative tightening (QT) policies directly influence the amount of USD in the market. When QE is implemented, USD increases, reducing its purchasing power; when QT is carried out, USD decreases, leading to a relative appreciation of the dollar.

Currently, during the rate cut cycle, the Fed’s attitude toward QT has become increasingly cautious, which effectively increases USD supply in the market and further fuels expectations of USD depreciation.

What Exactly Is the USD Exchange Rate? How to Measure Its Strength

Difference between exchange rate and USD index

The USD exchange rate usually refers to the USD against other currencies. For example, EUR/USD=1.04 means $1.04 can exchange for 1 euro; if it rises to 1.09, it indicates the euro has appreciated and the dollar has depreciated.

But a more important measure is the US Dollar Index, which tracks the overall performance of the dollar against a basket of major currencies (euro, yen, pound, etc.). During the 2022-2023 rate hike cycle, the USD index once broke through 114, reaching multi-year highs. As rate cuts commence, this index faces downward pressure.

It’s important to note that USD index movements are influenced by multiple factors: US monetary policy is just one; other countries’ central bank policies and economic conditions are equally critical. A unilateral rate cut by the US does not necessarily lead to a decline in the USD index; global central bank coordination must also be observed.

Four Core Factors Driving USD Downward

1. Continued Deepening of the Global “De-dollarization” Wave

Since the US abandoned the gold standard, its monetary policy has increasingly affected global wealth distribution. In recent years, the trend toward de-dollarization has become more evident:

• EU promoting euro settlement
• China pushing forward with yuan crude oil futures
• Rise of virtual currencies as alternative assets
• Central banks worldwide increasing gold reserves

These developments are eroding the international status of the dollar. If the US cannot effectively restore confidence through policy, USD liquidity will continue to decline, further depressing the USD exchange rate.

2. Trade Deficits and Declining Export Competitiveness

The US has long-standing trade deficits (imports > exports), which influence the supply and demand of USD. With more aggressive trade protection policies, the US may engage in tariff wars globally, leading to fewer US business transactions, decreasing demand for USD, and creating bearish pressure on the USD exchange rate.

3. Credit Risks and Geopolitical Uncertainty

US credit issues are impacting the USD trend. Debt problems, political divisions, frequent geopolitical conflicts—all increase global uncertainty about the US. When geopolitical risks erupt, the USD often temporarily appreciates as a safe-haven currency, but in the long run, a credit crisis will erode the fundamental attractiveness of the dollar.

4. Relative Interest Rate Differentials—Key Variable

This is a point many investors overlook: The movement of the USD index is not an absolute value but a relative one. Even if the Fed cuts rates, if other major central banks cut rates faster or more aggressively, the USD may still appreciate.

For example, the Bank of Japan has ended its ultra-low interest rate era, leading to capital flowing back into Japan and pushing the yen higher; Europe’s economy remains weak but has not significantly cut rates, temporarily supporting the USD; Taiwan follows US policy but faces domestic housing market considerations that limit rate cuts, so the TWD’s appreciation against the USD is limited.

Historical Review of USD Exchange Rate: From 1970 to 2025

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

• 2008 Financial Crisis: Market panic led to massive capital inflow into USD, sharply appreciating the dollar
• 2020 Pandemic Period: US stimulus measures weakened the dollar temporarily, but economic recovery caused a rebound
• 2022-2023 Rate Hike Cycle: Aggressive Fed rate hikes drove the USD to new highs
• 2024-2025 Rate Cut Initiation: The Fed begins rate cuts, capital flows into cryptocurrencies, gold, etc., putting downward pressure on the USD

This history teaches an important lesson: USD trends follow economic cycles, not just single policies.

Asset Allocation Strategies in the USD Downtrend

Gold: Benefiting from USD Weakness

A depreciating dollar directly benefits gold. Since gold is priced in USD, a weaker dollar lowers the cost of buying gold, increasing demand. Additionally, in a rate-cut environment, the opportunity cost of holding gold decreases, further boosting its attractiveness.

Stock Market: Rotation between Tech Stocks and Emerging Markets

US rate cuts encourage capital inflows into equities, especially tech and growth stocks. However, if the USD weakens excessively, foreign investors might shift to Europe, Japan, or emerging markets, reducing the appeal of US stocks. Investors should closely monitor capital flow shifts.

Cryptocurrencies: Hedge Against Inflation

A weakening dollar implies declining purchasing power, generally positive for cryptocurrencies. Investors seek assets to hedge inflation; Bitcoin is viewed as “digital gold,” performing especially well during global economic turbulence and USD depreciation.

Prospects for Various Currencies

USD/JPY: Japan ending ultra-low interest rates, yen appreciating, USD/JPY may weaken

TWD/USD: TWD follows USD trend, but domestic policy limits rate cuts, so TWD’s appreciation against USD is limited

EUR/USD: Euro remains relatively strong, but Europe’s weak economy and high inflation mean future movement depends on ECB policy pace

USD Outlook for 2025: High-Level Fluctuations with a Downward Bias

Based on various factors, the USD index is highly likely to show “high-level oscillation followed by weakening” over the next year, rather than a one-way sharp decline.

Many factors are bearish for the USD—de-dollarization trend, trade war escalation, increased credit risks. But investors should not ignore that: The USD remains fundamentally a global safe-haven currency. When geopolitical risks escalate or financial crises erupt, capital will flow back into USD, causing short-term rebounds.

Therefore, investing in USD should not mechanically follow the simple logic of “rate cuts = depreciation,” but require dynamic observation of global policy coordination, relative interest rate differentials, and market sentiment changes.

Practical Investment Advice: Seize Opportunities Amid Volatility

Key Indicators to Watch

Monthly CPI releases, Fed meeting minutes, non-farm payroll reports—these are triggers for significant exchange rate fluctuations. Short-term investors can focus on these points for long and short positions.

Allocation Principles

• Long-term Holding: USD as a reserve asset still has defensive value, but its proportion should gradually decrease
• Dynamic Adjustment: Shift to gold, cryptocurrencies, or other currencies based on relative interest rates and geopolitical risks
• Risk Management: Avoid betting on a single direction; build a multi-asset portfolio to cope with different scenarios

Core Understanding

As long as uncertainty exists, trading opportunities will arise. The USD faces a high probability of decline during rate-cut cycles, but the rhythm and magnitude of the trend will be influenced by multiple factors. Early positioning and following market trends are the correct approach to capturing USD exchange rate fluctuations.

A rate cut cycle signifies a new market rhythm, and capital flows will shift accordingly—understanding this logic early allows you to find genuine investment opportunities in a declining USD environment.