2025 US Dollar Outlook: Limited Appreciation Potential, Initial Signs of Depreciation Risk

The Logic Behind the US Dollar Exchange Rate

The exchange rate of the US dollar essentially reflects the trading relationship between the dollar and other currencies. Taking EUR/USD as an example, if the index is 1.04, it means that exchanging 1 euro requires 1.04 dollars. When this value rises to 1.09, the euro appreciates and the dollar depreciates; conversely, a drop to 0.88 indicates the euro depreciates and the dollar appreciates.

The US Dollar Index (DXY) is composed of a weighted average of six major international currencies against the dollar, including the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. The index’s high or low indicates the strength or weakness of the dollar relative to these currencies. However, it is important to note that central banks’ policy adjustments often differ, so a rate cut by the Federal Reserve does not necessarily lead to an immediate decline in the dollar index; the key is whether the component countries also take corresponding measures.

The Current Dilemma of the US Dollar

The dollar has declined for five consecutive days, with the current dollar index hovering around 103.45, marking a new low since November. More notably, the dollar index has broken below the 200-day simple moving average, which is often seen as a clear bearish signal in technical analysis.

Recent US employment data has been weak, reinforcing market expectations of multiple rate cuts by the Federal Reserve. As US Treasury yields decline, the attractiveness of dollar-denominated assets diminishes. The future direction of the dollar will be directly influenced by the Fed’s monetary policy—frequent rate cuts could weaken the dollar further, while a pause or rate hikes might support a rebound.

Although there are short-term technical rebound opportunities, the overall trend still exerts pressure on the dollar. If the Fed indeed implements significant rate cuts and economic data remain weak, the dollar is likely to continue facing downward pressure into 2025. Based on technical analysis, macro factors, and market sentiment, the dollar index may remain weak for a period. Short-term rebounds are possible, but if rate cuts and economic weakness persist, the dollar index could further decline below the support level of 102.00.

The Historical Cycle of the US Dollar: From Glory to Decline

To understand whether the dollar will fall, it is necessary to review the eight major phases the dollar index has experienced since the collapse of the Bretton Woods system.

1971-1980 (Inflation and Crisis): After breaking free from the gold standard, the dollar depreciated continuously, with oil crises and high inflation pushing it below 90.

1980-1985 (Strong Recovery): Fed Chairman Paul Volcker adopted tough measures, raising the federal funds rate to 20%, maintaining it at 8-10% for a long period, pushing the dollar index to a historic high in 1985.

1985-1995 (Long Bear Market): Facing twin deficits, the US dollar entered a prolonged downtrend.

1995-2002 (Internet Boom): During Clinton’s presidency, the internet industry drove US economic growth, pushing the dollar index to nearly 120.

2002-2010 (Bubble Burst and Crisis): The dot-com bubble burst, 9/11, quantitative easing, and the 2008 financial crisis caused the dollar to plunge to lows around 60.

2011-2020 Early (Safe-Haven Appreciation): The European debt crisis and China’s stock market crash highlighted US stability, with Fed rate hike expectations supporting the dollar’s rebound.

2020 Early-2022 Early (Pandemic Easing): To counteract pandemic impacts, the Fed cut rates to 0% and launched unlimited QE, leading to a sharp depreciation of the dollar and soaring inflation.

2022 Early-2024 (Rate Hike Dilemma): To curb inflation, the Fed aggressively raised rates to a 25-year high, causing short-term dollar appreciation but damaging long-term confidence.

The Outlook for the US Dollar Against Other Major Currencies

EUR/USD: Appreciating Trend Expected

EUR/USD is currently trading around 1.0835, showing a continuous upward trend. If the dollar continues to weaken, Europe’s economy stabilizes, and the European Central Bank delays easing, the euro is likely to continue strengthening against the dollar. Key resistance levels are at 1.0900 and 1.1000; breaking through these could unlock further appreciation potential. On the technical side, previous highs and trendlines will serve as support, while new psychological levels will act as resistance.

GBP/USD: Range-Bound Uptrend

The GBP/USD trend is similar to EUR/USD, reflecting divergence in economic and policy conditions between the US and UK. Market expectations suggest the Bank of England will cut rates more slowly than the Fed, giving the pound a relative advantage. It is expected that GBP/USD will fluctuate upward within the 1.25-1.35 range in 2025, driven mainly by policy divergence and risk aversion. If the economic paths of the US and UK further diverge, the exchange rate could challenge above 1.40, but political risks and liquidity shocks may cause pullbacks.

USD/CNH: Short-Term Range Trading

USD/CNH is oscillating between 7.2300 and 7.2600, lacking momentum for a breakout. US monetary policy and China’s economic situation will jointly influence this rate. If the Fed continues to cut rates and China’s economy slows, the yuan may face pressure, and the dollar could strengthen. The central bank’s exchange rate policy should not be underestimated. Technically, 7.2260 is a key support; a break below with oversold signals could trigger a rebound buying opportunity.

USD/JPY: Downward Pressure Emerging

USD/JPY is the most liquid currency pair globally. Japan’s January wage growth hit a 32-year high (up 3.1% YoY), indicating a possible shift in Japan’s long-term low inflation and low wage environment. As wages rise and inflation pressures emerge, the Bank of Japan may adjust its interest rate policy. If international pressures accelerate rate hikes, USD/JPY could continue downward. Technical support is at 146.90; a break below could test lower levels further. To reverse the downtrend, a break above 150.0 resistance is needed. The outlook for 2025 suggests a downward trend, with rate cut expectations and Japan’s economic recovery being the main trading themes.

AUD/USD: Economic Data Supports Upside

Australia’s Q4 GDP grew 0.6% QoQ and 1.3% YoY, both exceeding expectations. January’s trade surplus rose to 56.2 billion, showing strong performance. These data support a stronger Australian dollar. The Reserve Bank of Australia remains cautious, with a low likelihood of rate cuts, implying continued relatively hawkish policy stance that supports the AUD. Despite potential US dollar adjustments and global economic uncertainties, if the Fed maintains easing into 2025, a weaker dollar will drive AUD/USD higher.

Investment Strategies for the US Dollar in 2025

Short-term (Q1-Q2): Capture Structural Volatility Opportunities

Bullish scenario: escalation of geopolitical conflicts, US economic data exceeding expectations, market delaying rate cuts—these factors could push the dollar index rapidly to 100-103.

Bearish scenario: continuous Fed rate cuts, weak US economic data, cold Treasury auctions—these could damage dollar credibility, pushing the index below 95.

Investment advice:

• Aggressive investors can buy low and sell high within the DXY 95-100 range, using MACD, Fibonacci, and other technical tools to catch reversal opportunities.
• Conservative investors should mainly wait and see, until the Fed’s policy path becomes clearer.

Mid-to-Long-Term (Q3 and beyond): Gradually Shift to Non-USD Assets

As the Fed’s rate cut cycle deepens and US Treasury yields narrow, capital may flow into high-growth emerging markets or recovering Eurozone. If the global trend of de-dollarization accelerates (e.g., BRICS countries promoting local currency settlement), the dollar’s reserve currency status could weaken marginally.

Investment advice: gradually reduce dollar long positions and shift to reasonably valued non-USD currencies (yen, AUD, etc.) or commodities (gold, copper, etc.).

The trading opportunities for the dollar in 2025 will increasingly depend on “economic data” and “policy events.” Only by staying flexible and disciplined can investors achieve excess returns amid exchange rate fluctuations.