Dollar Trend Forecast Under the Start of the Rate Cut Cycle｜2025 US Dollar Exchange Rate Trends and Asset Allocation Guide

A Historical Perspective: The Eight Major Cycles of the US Dollar Index

To understand the current outlook for the US dollar, it’s helpful to review its development over the past 50 years. Since the collapse of the Bretton Woods system in the 1970s, the dollar index has experienced eight key phases, each driven by significant economic events.

The 2008 Financial Crisis triggered market panic, leading to a massive capital flight into the dollar, causing a sharp appreciation. During 2020’s pandemic period, the US implemented easing policies to stimulate the economy, temporarily weakening the dollar. However, as the US economy recovered, the dollar rebounded strongly. The 2022-2023 aggressive rate hike cycle made the dollar unusually strong against most currencies, with the dollar index briefly surpassing 114, a historical high.

Entering 2024-2025, the Federal Reserve has begun a new cycle of rate cuts. According to the latest dot plot forecasts, the goal is to bring the dollar interest rate down to around 3% by 2026. This policy shift will test the dollar’s attractiveness, potentially redirecting capital flows into risk assets.

Core Drivers of the US Dollar Exchange Rate

Interest Rate Policies: The Market’s Expectations Game

Interest rates are the most direct factor influencing the dollar’s exchange rate. When rates rise, dollar returns increase, attracting global capital; conversely, rate cuts weaken the dollar’s appeal, prompting capital to shift to higher-yield markets.

However, there is a key misconception: Investors should not only focus on the current rate hikes or cuts but also on market expectations. The dollar market is highly efficient; it won’t wait for rate cuts to officially start weakening, nor for rate hikes to confirm before rising. Therefore, using Fed dot plots to forecast future policy directions is crucial for investment strategies.

Dollar Supply: QE and QT Tug-of-War

Quantitative easing (QE) and quantitative tightening (QT) directly impact dollar liquidity. During QE, the supply of dollars increases, which can lower its value; during QT, the dollar supply decreases, potentially pushing the dollar higher.

The key is that these changes do not manifest immediately; they take time to influence the exchange rate market. Investors need to closely monitor Fed policy signals.

Trade Structure: The Impact of Trade Imbalances

The US has maintained a trade deficit—imports exceeding exports—for a long time. When imports increase, businesses need more dollars to pay, pushing the dollar higher; when exports rise, the opposite occurs. However, these effects are usually long-term and not immediately apparent.

It’s worth noting that US trade policies are becoming more aggressive. The US is no longer only imposing tariffs on specific countries but may adjust tariffs globally. This development could reduce trade with the US, which is unfavorable for the dollar in the long run.

Global Confidence: The Challenge of De-dollarization

The dollar’s status as the world’s primary settlement currency depends on global trust in the US’s economic, political, and military strength. However, this advantage faces unprecedented challenges.

Since the US abandoned the gold standard, de-dollarization waves have become more evident. The euro’s creation, the launch of yuan crude oil futures, the rise of cryptocurrencies, and more countries purchasing gold reserves instead of US Treasuries are all eroding dollar dominance. Since 2022, many nations’ confidence in the dollar and US debt has noticeably declined.

If the US cannot effectively restore global confidence in the dollar through policy, future dollar liquidity may decrease, which explains why the Fed has become more cautious with interest rate and liquidity decisions.

Key Observations on the Current Dollar Outlook

Bearish Factors Dominate

Currently, more factors are weighing on the dollar than supporting it:

1. Increased trade policy uncertainty — as mentioned, the risk of global tariff wars is rising
2. De-dollarization continues — countries are diversifying their reserves
3. Capital flows shifting — rising appeal of gold, cryptocurrencies, and other safe-haven assets

These combined factors suggest that the dollar index is more likely to experience “high-level oscillation followed by weakening” over the next 12 months rather than a sharp decline.

Geopolitical Risks Remain a Variable

Although rate cuts hint at a weaker dollar, geopolitical risks cannot be ignored. If new conflicts or financial crises emerge, capital will likely flow back into the dollar en masse, as it remains the most reliable “safe-haven currency” globally.

The Key to Relative Strength: The Pace of Rate Cuts in Other Currencies

A often overlooked point is that most of the currencies in the dollar index are also beginning to cut rates. The strength of the dollar is often determined not by absolute interest rates but by the relative pace of rate cuts.

For example, if the European Central Bank maintains higher rates while the Fed aggressively cuts, the euro may appreciate against the dollar, leading to a weaker dollar. Therefore, it’s essential to monitor global central bank policies simultaneously.

The Impact of Dollar Trends on Asset Allocation

Gold: The Main Beneficiary of a Weakening Dollar

A weakening dollar generally benefits gold. Since gold is priced in dollars, a decline in the dollar reduces the global cost of buying gold, boosting demand. Additionally, in a rate-cut environment, the opportunity cost of holding gold decreases, further increasing its attractiveness.

Stock Markets: Short-term Stimulus, Long-term Watch on Foreign Flows

US rate cuts tend to stimulate capital inflows into equities, especially tech and growth stocks. However, if the dollar weakens excessively, foreign investors might shift their investments to Europe, Japan, or emerging markets, which could weaken the appeal of US stocks.

Cryptocurrencies: Hedge Against Inflation

A weaker dollar means reduced purchasing power, which often positively impacts the crypto market. Bitcoin, dubbed “digital gold,” is seen as a store of value during global economic turbulence, dollar depreciation, or rising inflation.

Key Focus Areas for Major Currency Pairs

USD/JPY (US dollar/Japanese yen) — Japan’s end of ultra-low interest rates may lead to capital returning, pushing the yen higher. The likelihood of yen appreciation and USD/JPY depreciation is high.

TWD/USD (New Taiwan dollar/USD) — Taiwan’s interest rates usually follow US policy, but domestic factors (like housing policies) also constrain movement. During a rate-cut cycle, the TWD is expected to appreciate, but the rise will be limited.

EUR/USD (Euro/USD) — The euro remains relatively strong against the dollar, but European economic conditions are concerning, with high inflation and weak growth. If the ECB gradually cuts rates, the dollar may weaken slightly but not sharply depreciate.

Seizing Trading Opportunities Based on Dollar Forecasts

Understanding dollar movements is not just academic; it directly impacts investment returns, asset allocation, and retirement planning. This rate-cutting cycle signals a shift in market dynamics—capital flows are changing, and opportunities are emerging.

In the short term, economic data releases (like CPI) can trigger significant forex volatility. Savvy investors can capitalize on these windows for trading.

Long-term, de-dollarization trends and the health of the US economy will be key variables determining the dollar index’s direction. Instead of passively waiting for exchange rate fluctuations, proactive positioning aligned with the trend is advisable.

Remember a fundamental principle: Any uncertainty contains investment opportunities. The key is to stay informed, analyze deeply, and find the initiative amid volatility.