Analysis of the 2025 US Dollar Index Trend: Technical Perspective on the US Dollar Depreciation Pressure

Composition and Meaning of the US Dollar Index

The US Dollar Index is an important indicator of the dollar’s international purchasing power. It is composed of the exchange rates of the dollar against six major currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. The level of the index reflects the strength or weakness of the dollar relative to these major economies’ currencies.

Taking the euro as an example, EUR/USD=1.04 means 1 euro can be exchanged for 1.04 dollars. If the exchange rate rises to 1.09, it indicates euro appreciation and dollar depreciation; conversely, a drop to 0.88 indicates dollar appreciation and euro depreciation.

It should be noted that the monetary policies of different countries’ central banks are often correlated, so a Fed rate cut does not necessarily directly lead to a decline in the dollar index. It also depends on whether other countries adopt similar policies to make an accurate judgment.

Current Technical Dilemma of the US Dollar Index

Recently, the dollar index has been continuously declining, reaching its lowest point since November (about 103.45), and breaking below the 200-day simple moving average—usually seen by traders as a clear bearish signal.

Economic data supporting this trend is also evident. The US employment data released in March fell short of expectations, increasing market expectations of multiple rate cuts by the Federal Reserve. Under these expectations, US Treasury yields have come under pressure, directly weakening the dollar’s appeal as a safe-haven asset.

Although there is short-term rebound potential, the overall downward trend still suppresses the dollar. If the Fed indeed initiates a rate-cut cycle and economic data remains weak, the dollar index could remain weak into 2025, even testing support levels below 102.00.

Historical Review: Eight Cycles of the US Dollar Index

Since the collapse of the Bretton Woods system in 1971, the dollar index has experienced continuous cycle rotations.

1971-1980 (First Downtrend): After the gold standard was abandoned, the dollar entered a period of excess. The subsequent oil crisis triggered high inflation, and the dollar index fell below 90.

1980-1985 (First Uptrend): Fed Chairman Paul Volcker aggressively raised the federal funds rate to 20% to curb inflation, strengthening the dollar index to a peak in 1985.

1985-1995 (Second Downtrend): The emergence of the US “dual deficits” (fiscal and trade deficits) led to a prolonged bear market for the dollar.

1995-2002 (Second Uptrend): The US economy grew strongly during the internet boom, capital flowed back into the US, and the dollar index rose above 120.

2002-2010 (Third Downtrend): The burst of the internet bubble, 9/11 attacks, and prolonged quantitative easing, combined with the 2008 financial crisis, drove the dollar index down to around 60 at the bottom.

2011-2020 Early (Third Uptrend): During the European debt crisis and China’s stock market crash, the US remained relatively stable, with the Fed raising rates multiple times, causing the dollar index to continue rising.

2020 Early - 2022 Early (Fourth Downtrend): Under the COVID-19 pandemic, the US implemented extremely loose monetary policies, lowering the benchmark interest rate to 0%, printing大量 money, which triggered inflation, causing a sharp decline in the dollar index.

2022 Early - 2024 End (Ongoing Downtrend): After inflation spiraled out of control, the Fed entered a violent rate-hike cycle, raising rates to a 25-year high and initiating QT. While inflation was contained, dollar confidence was challenged again.

Outlook for the US Dollar Index and Major Currency Pairs Before 2025

EUR/USD: Divergence of policies between Europe and the US drives euro appreciation

The EUR/USD exchange rate and the dollar index tend to move inversely. Supported by expectations of dollar depreciation, the European Central Bank’s policy shift, and improving economic conditions, if the Fed truly starts cutting rates while Europe’s economy continues to improve, EUR/USD is expected to continue rising.

The current exchange rate has risen to 1.0835. If it stabilizes at this level, it may continue to challenge key psychological levels like 1.0900. Technically, previous highs and trendlines will form strong support, with 1.0900 being an important resistance. Once broken, further upside potential is significant.

GBP/USD: Relative resilience of the pound supports upward movement

The relationship between the pound and the dollar is similar to EUR/USD. Market expectations that the Bank of England will slow its rate cuts compared to the Fed give the pound a relative advantage. If the BOE adopts a more cautious rate-cutting pace, GBP/USD will gain upward momentum.

Technical signals indicate that in 2025, GBP/USD is likely to remain oscillating upward within a core range of 1.25-1.35. Policy divergence and risk aversion will be main drivers. If economic conditions between the UK and US further diverge, the exchange rate may challenge above 1.40, but political risks and liquidity shocks should be watched carefully.

USD/CNH: The dollar’s trend depends on US-China policy outlook

The performance of USD/CNY is influenced not only by market supply and demand but also closely linked to US-China economic policy directions. If the Fed continues to tighten while China’s economy faces downward pressure, the dollar may appreciate against the yuan.

The People’s Bank of China’s exchange rate guidance will play a key role in long-term trends. From a technical perspective, USD/CNY is consolidating within the 7.2300-7.2600 range, lacking momentum for a breakout in the short term. A breakout would present new trading opportunities. If the dollar falls below 7.2260 and technical indicators show oversold signals, it could create conditions for a rebound buy.

USD/JPY: Japanese rate hike pressure drives yen appreciation

USD/JPY, one of the most liquid currency pairs globally, depends critically on Japan’s policy stance. Japan’s January basic wage growth of 3.1% year-over-year, a 32-year high, hints at a potential shift away from long-term low inflation and low wages.

Rising wages and potential inflationary pressures may prompt the Bank of Japan to adjust its interest rate policy in 2025. If the US exerts international pressure for rate hikes on Japan, it could accelerate BOJ policy adjustments, leading to a downtrend in USD/JPY. Technically, if the exchange rate breaks below 146.90, further declines are possible; reversing the current weakness would require a break above 150.0.

AUD/USD: Australian economic resilience supports the Australian dollar

Australia’s Q4 GDP grew 0.6% quarter-over-quarter and 1.3% year-over-year, both exceeding expectations. January trade surplus rose to 56.2 billion, showing strong performance. These data support the fundamentals of the AUD.

The Reserve Bank of Australia remains cautious, hinting that future rate cuts are unlikely, implying a relatively tight monetary policy stance, which supports the AUD. Although Australia’s economic data is strong, if the Fed adopts easing policies in 2025, the overall dollar weakening will still boost AUD/USD.

2025 US Dollar Investment Strategy: Short-term Volatility and Mid-term Shift

Short-term strategy (Q1-Q2): Capture swing opportunities

Bullish scenario for the dollar: Escalating geopolitical conflicts may push the dollar rapidly higher to 100-103; unexpectedly strong US employment and economic data could delay market expectations of rate cuts, driving a rebound.

Bearish scenario for the dollar: Continuous rate cuts by the Fed while the ECB lags will strengthen the euro, dragging the dollar index below 95; worsening US debt issues could increase dollar credit risk.

Trading advice: Aggressive investors can consider high-low trading within the 95-100 range of the dollar index, using technical tools like MACD divergence and Fibonacci retracements to catch reversal points. Conservative investors should wait and see until the Fed’s policy direction becomes clearer before acting.

Medium to long-term strategy (after Q3): Gradually reduce dollar holdings

As the Fed’s rate-cut cycle deepens, US Treasury yield advantages will narrow, and funds may flow into emerging markets with better growth prospects or into the Eurozone’s recovery opportunities. Meanwhile, if the global de-dollarization accelerates (e.g., BRICS promoting local currency settlement), the dollar’s status as a reserve currency could weaken marginally.

Long-term advice: Gradually reduce dollar long positions and increase holdings of reasonably valued non-US currencies (like yen, AUD) or commodities-linked assets (gold, copper, etc.).

The dollar’s outlook in 2025 will depend more on economic data and event sensitivity. Only by staying flexible and disciplined can investors capture excess returns amid exchange rate fluctuations.