The era of interest rate cuts is coming, can the US dollar's decline be stopped? The 2025 US dollar exchange rate trend and investment layout

The New Era of Dollar Rate Cuts

In September 2024, the Federal Reserve officially launched a new cycle of interest rate cuts. According to the latest dot plot, the goal is to bring the US interest rate down to around 3% by the end of 2026. For global investors, this rate cut cycle not only influences the dollar’s own movement but also reshapes the entire asset allocation landscape.

What does a rate cut mean? Simply put, “money becomes cheaper.” When US interest rates decline, the pursuit of returns drives capital toward riskier assets—stocks, cryptocurrencies, gold, and other higher-yielding targets. For long-term bearish dollar investors, this presents both opportunities and risks.

The Nature and Structure of the US Dollar Exchange Rate

The essence of the dollar exchange rate is the “exchange ratio,” reflecting the dollar’s purchasing power relative to other currencies. Take EUR/USD as an example; this cross rate indicates how many dollars are needed to exchange for one euro. When EUR/USD rises from 1.04 to 1.09, it signifies euro appreciation and dollar depreciation; the opposite indicates dollar appreciation.

However, to understand the true logic behind the dollar’s decline, we must introduce the concept of the “US Dollar Index.” The USD Index is not a single exchange rate but a comprehensive strength indicator of the dollar against a basket of currencies (euro, yen, pound, etc.). This means whether the dollar rises or falls depends not only on US policy but also on the stance of the central banks of these competing currencies. Therefore, a simple rate cut by the US does not necessarily lead to a decline in the USD Index; global central bank policies must also be observed.

Four Major Drivers Behind the Dollar’s Decline

1. Interest Rate Policies — The Most Direct Factor

Interest rates are the most direct barometer of dollar strength. High interest rates attract international capital inflows into dollar assets, pushing up the dollar exchange rate; low rates do the opposite. But savvy investors are not fooled by surface numbers—what matters is expectations, not current figures.

Markets often price in policy changes in advance. The dollar does not wait for the central bank to confirm rate cuts before weakening; the market reacts early to expectations. This also explains why dot plot releases often trigger sharp volatility—smart capital has already positioned itself.

2. Money Supply — The Hidden Long-Term Force

Quantitative easing (QE) increases dollar supply, diluting its value; quantitative tightening (QT) reduces supply, supporting dollar appreciation. Currently, the Fed is implementing QT, but this effect is not immediate and takes time to fully manifest.

3. Trade Structure — Structural Short

The US’s long-standing trade deficit (imports > exports) is a structural factor behind dollar depreciation. When US imports increase, companies need more dollars to pay, temporarily boosting the dollar; when exports decline, dollar demand shrinks, leading to dollar depreciation. These changes are usually slow but directionally clear.

4. US Credit and Global Status

The dollar’s status as the global reserve currency fundamentally stems from America’s political, economic, and military influence worldwide. But since abandoning the gold standard, the wave of “de-dollarization” has been quietly spreading—establishment of the eurozone, yuan crude oil futures, rise of cryptocurrencies—all eroding dollar hegemony.

Since 2022, many central banks have reduced US bond holdings and increased gold reserves. If the US cannot rebuild international confidence, the dollar’s decline will no longer be a short-term fluctuation but a long-term structural trend.

Historical Perspective: Where Did the Dollar Come From?

Over the past 50 years, the dollar has experienced eight major cycles. During the 2008 financial crisis, market panic drove capital back into the dollar, causing a sharp appreciation; in 2020, during the pandemic, massive US stimulus temporarily weakened the dollar, but as the US economy quickly recovered, the dollar rebounded strongly; in the aggressive rate hike cycle of 2022-2023, the dollar was strong against most currencies, with the USD Index once breaking above 114.

Today, this cycle is reversing. Rate cuts, de-dollarization acceleration, rising geopolitical risks—all these factors are pushing the dollar downward.

2025: Will the Dollar Fall or Rise? Market Consensus and Risks

Based on the current environment, the factors bearish for the dollar clearly outweigh the bullish ones:

Bearish Factors:

• Escalation of trade wars: The US is no longer just fighting a trade war with China but imposing tariffs globally, reducing the use of the dollar in international trade.
• Accelerated de-dollarization: Central banks worldwide continue to reduce US debt holdings and increase gold reserves, weakening dollar liquidity.
• Geopolitical risks: Frequent conflicts and rising market uncertainties.

Bullish Factors: Are Relatively Limited

Therefore, the likelihood is higher that the USD Index will fluctuate at high levels and then trend downward, rather than plummeting unidirectionally.

But here’s a key logic: Although the US is starting rate cuts, the currencies that make up the USD Index (except the yen) are also lowering interest rates. The faster and larger the rate cuts, the more the respective currency appreciates. For example, if the US aggressively cuts rates while Europe holds steady, a decline in the dollar and a rise in the euro become inevitable.

Additionally, investors cannot ignore the “safe-haven characteristic.” If a new geopolitical crisis or financial storm erupts, capital will flow back into the dollar for safety. This is the dollar’s last line of defense as the global reserve currency.

Chain Reactions of the Dollar’s Decline on Various Assets

Gold: The Biggest Beneficiary

When the dollar falls, gold benefits most. Since gold is priced in dollars, a weaker dollar directly lowers the cost of buying gold. At the same time, rate cuts reduce the opportunity cost of holding gold—since yields on other assets decline, gold’s appeal as a zero-yield asset increases.

Stock Market: Capital Flows Improve but Foreign Investors May Shift

Lower US interest rates encourage capital inflows into stocks, especially tech and growth stocks. But if the dollar falls too much, foreign investors might shift to Europe, Japan, or emerging markets, weakening the attractiveness of US equities.

Cryptocurrencies: Hedge Against Inflation

A falling dollar means declining dollar purchasing power. Bitcoin, as “digital gold,” is often viewed as an inflation hedge in times of global economic turmoil and dollar depreciation, thus a declining dollar usually boosts crypto markets.

Currency Pair Battles: One-on-One Competition

USD/JPY (Dollar-Yen): The Bank of Japan is ending its ultra-low interest rate era, prompting capital to flow back into Japan and pushing up the yen. A yen appreciation and dollar depreciation against the yen are highly likely.

TWD/USD (Taiwan Dollar to US Dollar): Taiwan follows US rate cuts but not synchronously. Plus, Taiwan aims to cool housing prices and is cautious about rate cuts. As an export-oriented economy, a lower exchange rate benefits exports. Therefore, in the dollar decline cycle, the TWD will appreciate but with limited scope.

EUR/USD (Euro to US Dollar): The European economy is relatively weak, but the euro remains relatively resilient. Even if the European Central Bank gradually cuts rates, the dollar’s decline won’t be too large because Europe faces its own issues.

Practical Investment: How to Profit in a Falling Dollar Environment

This rate cut cycle is not just headlines; it directly impacts your investment returns and asset allocation. Instead of passively waiting, it’s better to proactively position and profit along the trend.

Short-term Opportunities: Before and after key economic indicators like CPI and employment data are released, the USD often experiences volatile swings. Smart traders can track these releases to go long or short for short-term arbitrage.

Mid-term Positioning: After confirming the dollar’s downward trend, gradually increase allocations to hedging assets like gold and cryptocurrencies, while also paying attention to arbitrage opportunities from exchange rate movements.

Risk Management: Remember, where there is uncertainty, there are trading opportunities, but also risks. Any aggressive decision should be accompanied by stop-loss plans.

The era of dollar decline has begun—are you prepared?