2025 USD Exchange Rate Trend Analysis | Global Capital Flows and Investment Opportunities in the Era of Rate Cuts

In 2024, the Federal Reserve initiates a rate-cutting cycle, a decision that will have profound impacts on global financial markets. Simply put, lowering interest rates means cheaper borrowing costs, which may lead capital to flow from traditional fixed-income products into higher-risk assets, while the relative attractiveness of the US dollar diminishes. This presents both opportunities and challenges for investors.

The US dollar is not just an American issue. As the world’s primary settlement currency, any adjustments in US interest rates will influence international trade settlements, central banks’ foreign exchange reserve allocations, and consequently affect capital distribution across global markets. According to the latest FOMC dot plot guidance, the policy goal is to bring the US benchmark interest rate down to around 3% by 2026.

So, what is the core driver of USD exchange rate movements? During this upcoming rate-cutting cycle, will the dollar continue to depreciate? How can investors seize these market opportunities? This article will analyze each aspect in detail.

What is the USD exchange rate? Starting from basic concepts

The USD exchange rate essentially reflects the price of US dollars in terms of other currencies. Taking EUR/USD as an example, this number indicates how many US 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; conversely, when it drops to 0.88, the euro weakens relative to the dollar, which appreciates.

Unlike a single currency pair, the US Dollar Index (DXY) is a comprehensive indicator measuring the overall strength of the dollar, composed of a weighted basket of major currencies (euro, yen, pound, etc.). It’s important to note that fluctuations in the USD index are influenced not only by US monetary policy but also by the policies and economic fundamentals of the issuing countries of these currencies. Therefore, a simple rate cut does not directly cause the USD index to fall; other countries’ policy directions and competitive dynamics must also be considered.

Four key factors influencing USD exchange rate trends

1. Interest rate policy — the most direct driver

Interest rates are the most immediate factor affecting the USD exchange rate. When rates rise, the dollar’s attractiveness increases, attracting capital seeking higher returns; when rates fall, funds may shift to other markets with better yields, putting downward pressure on the dollar.

However, mature investors should not only focus on current rate hikes or cuts but also on market expectations for future rates. Due to the high efficiency of the forex market, the dollar will not wait for a confirmed rate hike to start appreciating, nor for a confirmed rate cut to begin depreciating. The dot plot guidance often leads market reactions ahead of actual policy changes.

2. Money supply (QE and QT)

Quantitative easing (QE) and quantitative tightening (QT) directly impact liquidity and dollar supply. During QE, central banks inject large amounts of liquidity, increasing the total dollar supply in the market, which can dilute the dollar’s value; QT has the opposite effect, reducing dollar supply by shrinking the central bank’s balance sheet, potentially pushing the dollar higher.

The key point is that these effects are not immediate. Investors need to closely monitor subtle changes in the Fed’s policy stance.

3. International trade and trade imbalances

The US has long maintained a trade deficit—imports exceeding exports. When US imports increase, more dollars are needed for payments, supporting dollar appreciation; conversely, when exports rise, dollar demand decreases, possibly leading to depreciation. However, such effects are usually long-term and limited in the short run.

4. Global trust and geopolitical factors

The dollar’s status as the global settlement currency stems from worldwide confidence in the US economy’s strength and political stability. Currently, the main challengers to the dollar are the eurozone and the renminbi, which are also widely used internationally. As long as the US maintains its dominance in global politics, economy, and military power, the dollar will find it difficult to depreciate significantly, and may even continue to appreciate through technological innovation.

However, this advantage is eroding. Since the US abandoned the gold standard, unrestrained interest rate adjustments have affected global wealth distribution, sparking a de-dollarization wave. The creation of the euro, the launch of renminbi crude oil futures, and the rise of cryptocurrencies are gradually challenging dollar hegemony. Especially since 2022, de-dollarization trends have become more evident, with many countries questioning the dollar’s value and increasing gold reserves. If the US cannot effectively restore international confidence in the dollar, its future liquidity may face downward pressure, which explains why the Fed has become more cautious in its rate and quantitative policy decisions.

Half a century of USD exchange rate trends: a review

Over the past 50 years, the USD exchange rate has been highly correlated with major economic events. Since the collapse of the Bretton Woods system in the 1970s, the dollar index has gone through eight major phases.

Some landmark events include:

• 2008 Financial Crisis: Market panic led to a massive flight to the safe haven of the dollar, sharply boosting the dollar index
• 2020 Pandemic Shock: US government massive liquidity injections caused a short-term weakening of the dollar, followed by a strong rebound as the economy recovered
• 2022-2023 Aggressive Rate Hike Cycle: The Fed raised rates sharply to combat inflation, resulting in a strong dollar against most currencies, with the dollar index briefly surpassing 114
• 2024-2025 Rate Cut Cycle: As inflation subsides, the Fed begins to lower rates, reducing the dollar’s attractiveness and shifting capital toward gold, cryptocurrencies, and other alternative assets

In the long term, the progress of de-dollarization and the health of the US economy will determine the direction of the dollar index.

USD exchange rate forecast—2025 and beyond

Based on the four key factors and current market conditions, here are the main observations on the USD trend:

Factors bearish for the dollar:

• The rate-cutting cycle has begun, narrowing the US rate advantage
• US trade policies are becoming more aggressive, with potential escalation of tariffs against China, which could reduce international trade with the US and weaken the dollar
• The de-dollarization trend continues, with rising gold prices reflecting this shift
• Geopolitical risks are frequent, increasing global economic uncertainty

Factors supporting the dollar:

• The dollar remains the ultimate safe-haven currency; during regional conflicts or financial crises, capital tends to flow back into USD
• Other currencies in the dollar index (euro, yen, etc.) are also lowering rates, so relative competitiveness depends on who cuts faster and by how much

Core judgment: In the early stages of rate cuts, the USD index is more likely to show “high-level oscillation followed by gradual weakening” rather than a sharp decline. This is because, although the dollar begins to cut rates, other currencies in the basket are also experiencing similar policy shifts, requiring dynamic comparison of relative strength.

Impact of USD trends on different asset classes

Gold Market

A weakening dollar benefits gold. Gold is priced in USD; when the dollar depreciates, the cost to buy gold in USD terms decreases, boosting demand. Additionally, in a rate-cut environment, the opportunity cost of holding non-yielding assets like gold declines, making it more attractive.

Stock Market

Lower interest rates generally encourage capital inflows into equities, especially tech and growth stocks. However, if the dollar weakens excessively, foreign investors might shift funds to Europe, Japan, or emerging markets, reducing US stock attractiveness.

Cryptocurrency Market

A depreciating dollar means reduced dollar purchasing power, which often positively stimulates crypto assets. Investors seeking assets to hedge inflation tend to favor Bitcoin, known as “digital gold,” especially during global economic turbulence and dollar depreciation.

Major currency pair forecasts

USD/JPY: Japan has just ended its ultra-low interest rate policy, and capital returning to Japan could strengthen the yen, leading to a potential USD/JPY depreciation.

TWD/USD: Taiwan’s interest rate policy usually follows the US, but domestic housing market controls limit rate cuts. As an export-oriented economy, a lower exchange rate benefits exports. Expect a slight TWD appreciation, but with limited magnitude.

EUR/USD: The euro shows technical strength against the dollar, but Europe’s economy remains weak, with high inflation and sluggish growth. If the European Central Bank gradually cuts rates, the dollar may weaken slightly but not significantly depreciate.

How to find investment opportunities amid USD exchange rate fluctuations

The strength or weakness of the dollar is not just a news topic; it directly impacts investment returns, asset allocation strategies, and retirement planning. The start of a rate-cutting cycle signals capital reallocation and new trading opportunities.

Instead of passively accepting exchange rate volatility, investors should proactively position themselves based on trends.

Short-term trading: Each economic data release can trigger exchange rate swings. For example, before and after monthly CPI data, the USD index often experiences significant volatility. Short-term traders can seize these windows for long or short positions.

Medium-term strategies: Keep a close eye on central bank policy shifts, international trade developments, and de-dollarization progress, as these factors will determine the overall direction of USD strength.

The core principle is: Whenever there is uncertainty in the market, trading opportunities exist. The key is whether one can identify signals, react promptly, and manage risks effectively.