The 2025 USD interest rate trend reverses｜Analyzing the USD exchange rate fluctuation mechanism and investment strategies from the interest rate cut cycle

The U.S. Dollar Rate Cut Begins, Global Market Sentiment Is Changing

In September 2024, the Federal Reserve officially launched a rate-cutting cycle, signaling a shift in the pulse of global capital markets. Simply put, when U.S. interest rates decline, the attractiveness of the dollar diminishes, prompting capital to flow into riskier assets, and the dollar faces downward pressure. According to dot plot expectations, the Fed aims to reduce the dollar interest rate to around 3% before 2026.

But the question is—Does the trend of U.S. interest rates directly mean the dollar will weaken? The answer is far more complex than it seems. The current global economic landscape is quietly transforming, and the logic behind dollar pricing is being recalibrated by the market.

The Underlying Logic of the U.S. Dollar Exchange Rate: Not Just Exchange Rates, But Global Capital Flows

The dollar exchange rate essentially reflects the exchange ratio between the dollar and other currencies. For example, EUR/USD=1.04 means $1.04 can exchange for 1 euro; if this rises to 1.09, it indicates the euro has appreciated and the dollar has depreciated; conversely, if it drops to 0.88, the dollar has appreciated.

The U.S. Dollar Index (DXY) measures the dollar’s overall performance relative to a basket of major currencies (including euro, yen, pound, etc.). It’s important to note that, the fluctuations of the Dollar Index are not solely driven by U.S. policies but are also influenced by decisions of other central banks and economic fundamentals. Therefore, a simple rate cut by the Fed does not necessarily lead to a weaker dollar index; one must also observe the relative changes in global central bank policies.

Four Core Factors Influencing the U.S. Dollar Exchange Rate

1. U.S. Interest Rate Trends and Expectations Management

U.S. interest rates are the most direct driver of the exchange rate. When rates are high, the dollar attracts global capital; when rates fall, capital seeks higher returns elsewhere.

Key insight: Investors should not only look at the current rate hikes or cuts but also grasp the shift in rate expectations. Markets are efficient; they do not wait until rate cuts are confirmed before the dollar begins to weaken—they react in advance. Expectations of interest rate trends are often priced in through the dot plot ahead of time, so understanding central bank guidance is the correct strategy.

2. U.S. Money Supply: The Hidden Hand of QE and QT

The supply of dollars in the market is not fixed but dynamically adjusted according to the Federal Reserve’s quantitative easing (QE) or quantitative tightening (QT) policies. During QE periods, dollar supply increases, putting downward pressure on the dollar; during QT, dollar supply tightens, boosting the dollar’s value.

However, these changes are not immediate, and investors need to continuously monitor the Fed’s policy stance.

3. Trade Deficit and Dollar Demand

The U.S. has a long-standing trade deficit, importing more than it exports. Increased imports require more dollars for payments, which is bullish for the dollar; expanding exports reduce dollar demand, which is bearish. But such structural factors tend to have long-term effects and are less impactful in the short term.

4. Global Confidence and De-dollarization Challenges

The dollar’s role as the global settlement currency stems from the U.S.’s strong credit backing. However, in recent years, the dollar’s dominance faces three major challenges: the expansion of the eurozone, the launch of yuan-denominated oil futures, and the rise of the cryptocurrency ecosystem.

Since 2022, de-dollarization trends have become more evident, with many countries reducing holdings of U.S. Treasuries and increasing gold reserves, losing confidence in the dollar’s supremacy. If the U.S. cannot effectively restore international confidence in the dollar, its liquidity may decline in the future. This is also why the Fed has become more cautious in its rate decisions.

Fifty Years of U.S. Dollar History: Major Events That Rewrote Exchange Rates

Looking back over the past half-century of the dollar index, major economic events have had profound impacts:

• 2008 Financial Crisis: Market panic triggered a massive flight to the dollar for safety, sharply boosting the dollar index.
• 2020 Pandemic Shock: Large-scale fiscal stimulus in the U.S. raised inflation expectations, causing a brief dollar weakness, followed by a rebound due to the relative strength of the U.S. economy.
• 2022-2023 Rate Hike Cycle: The Fed’s aggressive rate hikes made the dollar strong against most currencies, with the dollar index surpassing 114.
• 2024-2025 Rate Cut Cycle: The Fed begins to lower rates, reducing the dollar’s appeal, and capital shifts toward cryptocurrencies and gold as alternative assets.

U.S. Interest Rate Trends and Future Exchange Rate Predictions

The current direction of the dollar exchange rate is influenced by multiple factors. A comprehensive analysis yields the following observations:

Bearish factors for the dollar:

• Escalating trade policies: The U.S. expanding tariffs from a unilateral China approach to global trade tensions, reducing trade with the U.S., bearish for the dollar.
• Continued de-dollarization: Gold prices keep rising, and countries are adjusting their reserves, exerting long-term pressure on the dollar.

Key variable—Geopolitical Risks and Liquidity Crises: Although rate cuts generally weaken the dollar, geopolitical risks or financial crises can trigger a flight to safety, strengthening the dollar as a safe-haven currency. Therefore, it’s immature to equate rate cuts directly with dollar depreciation.

Relative Policy Comparison—Interest Rate Differentials: While the dollar begins to cut rates, the currencies in the dollar index (except the yen) are also lowering rates. Who cuts faster or more aggressively will directly determine the exchange rate strength. For example, if the European Central Bank hesitates while the Fed cuts quickly, the euro will appreciate relative to the dollar, and the dollar will weaken.

Author’s view: The dollar index is likely to “oscillate at high levels and gradually weaken” over the next 12 months, rather than experiencing a sharp decline.

How Dollar Exchange Rate Fluctuations Affect Various Assets

Gold Market

When the dollar weakens, gold usually benefits. Since gold is priced in dollars, a depreciating dollar reduces the cost of buying gold, increasing demand. Additionally, a rate-cut environment lowers the opportunity cost of holding gold (relative to zero-yield assets), further boosting its appeal.

Stock Market

A rate-cut environment typically encourages capital inflows into stocks, especially tech and growth stocks. However, if the dollar weakens significantly, foreign investors may shift toward Europe, Japan, or emerging markets, weakening the inflow into U.S. equities.

Cryptocurrencies

When the dollar weakens, cryptocurrencies are generally bullish. The decline in dollar purchasing power prompts investors to seek inflation-hedging assets, and Bitcoin, as “digital gold,” is often viewed as a store of value during global economic turbulence and dollar depreciation.

Major Currency Pair Forecasts

USD/JPY (Dollar/yen): Japan has officially exited its ultra-low interest rate environment, prompting capital inflows that strengthen the yen. The outlook is for the dollar to weaken against the yen.

TWD/USD (New Taiwan dollar/US dollar): Taiwan’s interest rate policy follows the dollar, but domestic issues like the housing market and export competitiveness limit the TWD’s appreciation. During the rate-cut cycle, the TWD is expected to appreciate modestly.

EUR/USD (Euro/US dollar): The euro remains relatively strong, but Europe’s economic fundamentals are weak (high inflation, sluggish growth). If the European Central Bank gradually cuts rates, the dollar may weaken slightly but not sharply.

How to Find Trading Opportunities Amid Changing U.S. Interest Rates

The fluctuations in the dollar exchange rate are not just news topics—they directly impact investment returns and asset allocation. This rate-cut cycle signals a reshuffling of global capital flows—actively tracking rather than passively waiting is the correct approach to seize opportunities.

In the short term, each economic data release (such as CPI reports) can trigger sharp swings in the dollar index. Savvy investors analyze these key moments in advance and capitalize on short-term opportunities to go long or short.

Core principle: Whenever uncertainty exists, trading opportunities are embedded. The key is to establish a systematic analysis framework that integrates U.S. interest rate trends, relative policy changes, and geopolitical risk assessments, rather than blindly following a single factor.