Why is the US dollar continuously falling? Exchange rate trends and investment breakthroughs in the 2025 interest rate cut cycle

In the second half of 2024, the global financial markets are迎來 a significant turning point—the Federal Reserve officially initiates a rate-cutting cycle. Accompanying this policy shift, many investors have noticed signs of the US dollar beginning to weaken continuously. Why is the US dollar falling? Will it continue to decline in the future? The underlying reasons involve deep changes in the global economic landscape, which merit in-depth analysis.

The Fundamental Reasons for the Continuous Decline of the US Dollar

Rate-cutting cycle alters capital flows

When the Federal Reserve announces a rate cut, the most immediate market reaction is—the attractiveness of the US dollar diminishes. Imagine if keeping money in dollar assets yields less interest, investors will naturally start seeking other assets with higher returns. Cryptocurrencies, gold, growth stocks, and other risk assets thus become more popular, leading to large capital outflows from dollar assets.

According to the latest Fed dot plot expectations, the US interest rate will fall to around 3% before 2026. This expectation itself drives market pricing, causing the US dollar exchange rate to reflect rate cut expectations in advance—that is, the dollar hasn’t truly bottomed out, but the market is already betting on a weaker dollar.

De-dollarization wave accelerates

Another deep reason for the dollar’s ongoing decline is that the long-standing trend of “de-dollarization” is accelerating. Since the US abandoned the gold standard, the international credibility foundation of the dollar has gradually loosened. Especially since 2022, measures such as the US freezing Russia’s foreign exchange reserves have prompted many countries to reassess the safety of holding the dollar as a reserve currency.

The Eurozone expanding its usage scope, increased cross-border settlement in RMB, and gold reserves becoming a new popular choice—all are nibbling away at the dollar’s dominance. Historically, whenever the dollar faces a confidence crisis, it is usually accompanied by a depreciation cycle.

Impact of trade policy uncertainty

The US trade policy is becoming more aggressive. Previously, the US mainly focused on trade negotiations with specific countries, but now there are signs of initiating tariff wars with trading partners worldwide. This policy shift is actually bearish for the dollar—because it reduces the willingness of companies to do business with the US, thereby decreasing actual demand for the dollar.

The Logic Behind the US Dollar Exchange Rate

What determines the strength or weakness of the dollar relative to other currencies?

The dollar exchange rate is essentially a “relative price.” For example, EUR/USD represents how many US dollars are needed to exchange for 1 euro. When EUR/USD rises from 1.04 to 1.09, it doesn’t mean the euro has appreciated in absolute terms; rather, it indicates that the euro has appreciated relative to the dollar, and conversely, the dollar has depreciated.

The US Dollar Index (DXY) measures the overall strength of the dollar against a basket of major currencies (such as euro, yen, pound, etc.). In 2023, the dollar index once surged past 114, but by the end of 2024, it has clearly retreated, which is a concrete sign of dollar weakening.

Interest rate differentials determine exchange rate direction

Interest rates are the most direct force driving exchange rates. When US interest rates are high, global investors flock to dollar assets to earn interest; when rates fall, this attractiveness diminishes.

However, there’s a subtlety: A rate cut in the US alone doesn’t necessarily mean the dollar will fall; it depends on what other central banks are doing. If the European Central Bank and Bank of Japan also cut rates, then a “relative comparison” forms—who cuts faster, who cuts more, and whose currency will appreciate accordingly.

For example, the yen has long maintained ultra-low interest rates, but now Japan is gradually ending this policy, with capital flowing back into Japan, which could lead to yen appreciation against the dollar, while USD/JPY might weaken.

Four Core Factors Affecting the US Dollar Exchange Rate

1. Federal Reserve’s monetary policy stance

The Fed’s interest rate decisions are short-term drivers of the dollar exchange rate. But investors need to note that markets usually react in advance to expectations. That is, don’t wait for the official rate cut announcement for the dollar to start falling; smart markets will adjust based on dot plots, economic data forecasts, and expectations.

Therefore, tracking the Fed’s forward guidance, inflation data, employment reports, and other economic indicators is often more important than simply observing the actual rate decisions.

2. Changes in US money supply (QE and QT)

Quantitative easing (QE) and quantitative tightening (QT) directly influence the amount of US dollars in the market. During QE periods, the Fed buys assets extensively, increasing the money supply, which can dilute the dollar’s value; during QT, the opposite occurs, reducing supply and potentially strengthening the dollar.

Since 2024, the Fed has been gradually shifting from aggressive QT towards QE expectations, which is an important background supporting the dollar’s weakening.

3. International trade structure and trade deficits

The US has long maintained a trade deficit, with imports far exceeding exports. This affects the supply and demand dynamics of the dollar. However, this influence is usually long-term; it doesn’t immediately manifest in the short term.

Currently, the US’s increasingly aggressive trade policies may alter this dynamic. If trade wars escalate, demand for the dollar could decrease, creating new downward pressure.

4. US global credit and geopolitical status

The dollar’s status as the world’s primary reserve currency fundamentally stems from global trust in US strength and creditworthiness. But when this trust cracks—such as through foreign exchange freezes, debt ceiling disputes, or political disagreements—the dollar’s attractiveness diminishes.

This is also why many countries have increased gold reserves and pushed for de-dollarization in recent years. As long as this trend continues, the dollar faces long-term depreciation pressure.

Historical Trajectory of the US Dollar Exchange Rate

Over the past 50 years, the dollar index has experienced eight major phases, each with significant economic events behind large fluctuations:

• 2008 Financial Crisis: Market panic triggered massive capital inflows into the dollar, causing a sharp appreciation.
• 2020 Pandemic Period: US government stimulus measures led to a short-term dollar weakening, but it rebounded with economic recovery.
• 2022-2023 Aggressive Rate Hike Cycle: The Fed raised rates sharply to combat inflation, strengthening the dollar against other currencies, with the index surpassing 114.
• 2024-2025 Rate Cut Phase: The Fed shifts policy, reducing the dollar’s appeal, and capital flows into gold, cryptocurrencies, and other alternative assets.

From these historical cases, it is clear that the dollar’s strength or weakness is closely related to global risk appetite, Fed policies, and geopolitical patterns.

Possible Trends for the US Dollar in 2025

Short-term, the US dollar is unlikely to decline sharply in one direction

Although a rate-cutting cycle is usually bearish for the dollar, investors should not oversimplify this logic. Reality is more complex:

Geopolitical risks still exist. If new conflicts, financial crises, or systemic risks erupt, capital will flow back into the “safe-haven” dollar. For this reason, the dollar remains fundamentally the world’s most important safe-haven asset.

Other major economies are also cutting rates. The currencies included in the dollar index are not only the dollar but also euro, yen, pound, etc. If these central banks also cut rates, the dollar’s decline will be limited.

Policy expectations fluctuate. If actual rate cuts deviate from expectations (e.g., inflation rebounds causing the Fed to pause rate cuts), the dollar could rebound.

Most likely trend: oscillate at high levels then gradually weaken

Considering all factors, the most probable trend for the dollar index in 2025 is “initially oscillate at high levels, then gradually weaken,” rather than a sharp one-way depreciation.

There are indeed many bearish factors—rate cut expectations, accelerating de-dollarization, trade policy risks—but these effects take time to manifest. Meanwhile, any geopolitical tremors could cause counter-movements.

Chain reactions of dollar weakening on various asset classes

Gold will continue to benefit

In a weakening dollar environment, gold is a primary beneficiary. On one hand, buying gold with cheaper dollars reduces costs; on the other hand, a rate-cut environment lowers the opportunity cost of holding gold (since holding gold no longer suffers as much compared to high-interest dollar assets). Historical data shows that each dollar depreciation cycle is accompanied by gold price increases.

Stock markets face a double-edged sword

US stocks tend to benefit from rate cuts because borrowing costs decrease and valuations rise. But if the dollar depreciates excessively, foreign investors might shift to Europe, Japan, or emerging markets, weakening the inflow into US stocks. Tech stocks and growth stocks will be the first to benefit from rate cuts, but beware of capital outflows.

Cryptocurrencies gain momentum

The decline in the dollar’s purchasing power directly benefits the crypto market. Investors seeking assets to hedge inflation will focus on Bitcoin as “digital gold” and Ethereum as a “value network.” This explains why every dollar weakening cycle tends to bring bullish opportunities in crypto markets.

Specific outlooks for major currency pairs

USD/JPY (US dollar vs. Japanese yen): The Bank of Japan’s policy adjustments increase yen appreciation pressure; USD/JPY is expected to face depreciation pressure.

TWD/USD (New Taiwan dollar vs. US dollar): Taiwan’s economy is closely linked to the US, but as an export-oriented economy, a weaker currency benefits exports. Under a rate-cut environment, TWD is expected to appreciate but with limited scope.

EUR/USD (Euro vs. US dollar): The European economy is relatively weak, with high inflation but stagnant growth. If the ECB’s rate cuts are smaller than the Fed’s, the euro may appreciate; otherwise, the dollar could remain relatively firm.

How to Capture Investment Opportunities Amid US Dollar Fluctuations

Understand the logic behind volatility

Dollar exchange rate fluctuations are not random but rational responses to macroeconomic changes. CPI data, non-farm payrolls, Fed decisions all trigger short-term volatility. Learning to identify the timing and expectations of these events allows for proactive positioning.

Seize short-term trading opportunities

Short-term traders can capitalize on volatility around major data releases. For example, CPI announcements directly influence market expectations of future rate cuts, driving large swings in the dollar index. Analyzing consensus expectations and historical data in advance can improve prediction accuracy.

Medium- and long-term allocation strategies

If bearish on the dollar, consider increasing allocations in gold, cryptocurrencies, and other non-dollar assets like euro and yen. Conversely, if expecting the dollar to be supported by geopolitical factors, keep sufficient dollar cash as a hedge.

Core investment principles

Uncertainty always exists, and uncertainty is an opportunity. Whether the dollar ultimately strengthens or weakens, the market will inevitably generate significant volatility during this process. The key is to dynamically adjust strategies based on new information, rather than passively waiting for outcomes.

The phenomenon of the dollar’s continuous decline reflects not just exchange rate changes but signals a realignment of the global economic landscape. For investors, understanding the underlying logic is far more important than simply tracking ups and downs.