2025 USD Exchange Rate Trend Reversal | How the Rate Cut Cycle Can Capture Investment Opportunities

The US dollar enters a new era of rate cuts.

In September 2024, the Federal Reserve officially began a cycle of interest rate reductions. This is not just a US issue but a “seismograph” for the global capital markets. Simply put, rate cuts mean lower capital costs, and hot money will inevitably seek higher returns—at this time, cryptocurrencies, gold, and emerging market stocks become the most attractive options.

According to the latest dot plot forecast, the Fed expects to lower the benchmark interest rate to around 3% by 2026. What does this imply? It indicates that the attractiveness of the US dollar is waning during a recession, but it also signals a major reshuffle in asset allocation underway.

What determines the trend of the US dollar exchange rate?

Starting with the basics—the US dollar exchange rate is the “cipher” for swapping US dollars with other currencies.

For example, the EUR/USD (Euro to US dollar) quote is 1.04, meaning 1 euro can be exchanged for 1.04 dollars. If this number rises to 1.09, it indicates the euro is appreciating and the dollar is depreciating; conversely, if it drops to 0.88, the euro is weakening and the dollar strengthening.

But this is just the surface. The real driver of the dollar’s fate is the US Dollar Index—which compares the dollar against six major currencies including the euro, yen, pound, and Canadian dollar, reflecting the overall strength or weakness of the dollar.

Here’s a key point to remember: US rate cuts do not necessarily mean the dollar index will fall. Because other central banks are also cutting rates. The currency will move toward whichever central bank cuts more aggressively or more significantly.

Four forces influence the rise and fall of the dollar

1. Interest rate policy is the pulse of the dollar

High interest rates → dollar gains value → capital flows into the dollar → dollar appreciates
Low interest rates → dollar less attractive → capital flows out → dollar depreciates

But there’s a common trap for investors: don’t just look at current rate hikes or cuts, pay attention to “expectations”. Markets are efficient; they won’t wait until the Fed actually announces a rate cut for the dollar to start falling. Smart institutional investors have already positioned themselves in advance.

2. US dollar supply (QE and QT)

When the Fed implements quantitative easing (QE), a flood of dollars enters the market, increasing downward pressure on the dollar. Conversely, quantitative tightening (QT) reduces dollar liquidity, potentially pushing the exchange rate up. But these effects are sometimes delayed and not immediately visible.

3. Trade deficits as hidden drivers

The US has a long-term trade deficit, which suppresses dollar demand. Increased imports require more dollars (appreciating the dollar), while increased exports reduce dollar demand (depreciating the dollar). However, these effects usually take one or two years to manifest.

4. US credit issues threaten dollar dominance

The dollar’s strength fundamentally relies on global trust in the US. But that trust is now wavering.

Since the gold standard was abandoned, the wave of “de-dollarization” has risen—Euro has emerged, Chinese yuan oil futures have launched, cryptocurrencies and gold are becoming more popular. Especially after 2022, many countries have shifted toward buying gold, with interest in US Treasuries waning. If the US cannot rebuild international confidence, dollar liquidity could decline sharply. This is why the Fed has become particularly cautious in its decision-making.

Historical mirror of the dollar exchange rate trend

Over the past 50 years, the dollar has experienced several rollercoasters:

• 2008 Financial Crisis: Panic swept through, capital rushed back into the dollar, and the dollar index soared
• 2020 Pandemic Outbreak: US unleashed massive liquidity, dollar weakened temporarily, then rebounded with economic recovery
• 2022-2023 Aggressive Rate Hikes: The Fed raised rates repeatedly, causing the dollar to surge and crush many emerging market currencies, with the index even breaking 114
• 2024-2025 Rate Cut Cycle: Dollar’s attractiveness declines, capital shifts into cryptocurrencies, gold, and growth stocks

Forecast for the dollar exchange rate in the next 12 months

This is the most concerned question for investors. Based on multiple factors:

Factors bearish for the dollar dominate:

• Escalation of trade wars, US and global tariffs increase business costs, reducing dollar demand
• De-dollarization trend continues, gold keeps attracting funds
• Rate cut cycle begins, diminishing US interest rate advantage

But don’t naïvely expect the dollar to crash unilaterally. Geopolitical risks can erupt at any time (look at Middle East, Taiwan Strait tensions). When crises occur, the dollar’s role as the ultimate safe haven will be activated, and capital will flow back rapidly.

Another often overlooked detail: The other currencies in the dollar index are also cutting rates—it depends on who cuts faster and more aggressively. The yen, after ending ultra-low interest rates, has room to rise; the European Central Bank may slow its rate cuts, and these contrasts will directly influence the exchange rate direction.

The author’s view: The dollar index in the next year is more likely to “hover at high levels with gentle declines” rather than crash despairingly.

How do assets perform during a rate cut cycle

Gold becomes the biggest winner

Dollar depreciation → buying gold with dollars becomes cheaper → demand surges
Plus, rate cuts remove the “opportunity cost” of holding gold, leading to capital inflows, making a gold bull market a certainty.

Stock market movements depend on dollar strength

A weaker dollar indeed attracts funds into stocks (especially tech and growth stocks), but if the dollar weakens too much, foreign investors may flee to Europe, Japan, or emerging markets, reducing the US stock market’s attractiveness.

Cryptocurrencies may迎来春天

This is often overlooked by traditional investors. In a background of dollar depreciation, assets like Bitcoin, Ethereum, and other cryptos become more attractive as “inflation hedges”. Bitcoin, dubbed “digital gold,” is increasingly seen as a store of value during global economic turbulence and dollar shrinkage.

Major currency pair performance expectations

USD/JPY (US dollar to Japanese yen)
Japan has ended ultra-low interest rates, capital is starting to flow back, increasing yen appreciation pressure, and USD/JPY will face depreciation.

TWD/USD (New Taiwan dollar to US dollar)
Taiwan’s central bank usually follows the Fed’s rate cuts, but as an export-oriented economy, a weaker currency benefits manufacturing. The TWD is expected to appreciate mildly, but with limited scope.

EUR/USD (Euro to US dollar)
Europe’s economy is not strong, but the ECB’s pace of rate cuts may be less aggressive than the Fed’s, which supports the euro. In the future, USD/EUR will only depreciate gradually.

How investors can profit from USD exchange rate fluctuations

The trend of the dollar exchange rate is not just news but real trading opportunities.

In the short term, before and after monthly CPI releases, the dollar index often fluctuates wildly—these are excellent moments for long and short trades. As long as you time the economic data releases well, you can capture short-term swings.

More importantly, adjust your mindset: Uncertainty itself is the biggest opportunity. Rate cuts are not the death knell for the dollar but signals of market capital reallocation. Prepared investors can profit from this reshuffle, while passive ones will only watch opportunities slip away.

So the question is not “What will happen to the dollar,” but “How should I allocate assets to ride the wave.”