The wave of interest rate cuts is coming｜How high did the US dollar rise? 2025 US dollar trend analysis and trading layout guide

The US dollar is not just the currency of the United States; it is also a global economic barometer. Starting from September 2024, the Federal Reserve will initiate a cycle of interest rate cuts. According to the latest dot plot, the US interest rate target will be lowered to around 3% by 2026. For global investors, this rate-cutting spectacle presents both opportunities and hidden risks.

Understanding the Essence of Exchange Rates Before Grasping USD Fluctuations

The core definition of the US dollar exchange rate is simple—it is the ratio of US dollars to other currencies. Take EUR/USD as an example: when this value is 1.04, it means 1.04 USD can be exchanged for 1 euro. If this value rises to 1.09, it indicates the euro has appreciated relative to the dollar, which has weakened; conversely, if it drops to 0.88, the dollar has appreciated.

However, there is an important misconception: a unilateral rate cut by the US does not necessarily lead to a decline in the US dollar index. The dollar index is weighted by multiple major currencies and is influenced by the monetary policies and economic conditions of other countries. In other words, the Federal Reserve’s decisions are just one influencing factor; the stance of other central banks worldwide is the real balancing force.

Four Core Factors Driving USD Fluctuations

Interest rate policy is the primary driver. A high-interest-rate environment attracts capital into dollar assets, boosting the dollar’s value; low interest rates may lead to capital outflows. But investors should note that markets react to expectations of interest rate changes, not just the actual announcements. The dot plot is a tool to anticipate these expectations—smart markets often start to move before rate hikes are confirmed.

The supply of US dollars is also crucial. Quantitative easing (QE) increases dollar supply in the market, lowering its value; quantitative tightening (QT) reduces supply, potentially pushing the dollar higher. These changes also have a lag effect, so investors need to closely monitor shifts in Federal Reserve policy.

The international trade landscape shapes long-term exchange rate trends. The US has maintained a persistent trade deficit (imports exceeding exports), which affects the supply and demand balance of the dollar. Increased imports require more dollars, potentially pushing the dollar higher; increased exports reduce dollar demand. However, such effects are usually seen over the long term.

Global political confidence acts as an invisible support. The dollar’s status as the world’s reserve currency stems from global trust in US strength. If the US maintains its leadership in politics, economy, and military power, the dollar will not depreciate significantly. But in recent years, the wave of “de-dollarization” has been emerging—ranging from the euro’s establishment, the launch of RMB crude oil futures, to the rise of cryptocurrencies—all eroding the dollar’s monopoly. Since 2022, many countries have lost confidence in US debt and increased gold reserves. If the US cannot effectively rebuild confidence, the dollar’s liquidity may face downward risks.

Historical Reflection: The Dollar’s Performance During Major Events

Over the past 50 years, the dollar index has experienced 8 significant phases, each closely linked to major global events:

During the 2008 financial crisis, market panic caused a massive flight into the dollar, pushing the dollar index to its then-highest levels. In 2020, amid the pandemic shock, the Fed unleashed massive liquidity, temporarily pressuring the dollar, but it rebounded strongly as the US economy led the recovery. During the aggressive rate hike cycle of 2022-2023, the Fed’s hawkish stance boosted the dollar against most currencies, with the dollar index approaching a historic high of 114.

Entering 2024-2025, the rate-cut cycle begins, weakening the dollar’s appeal, and funds start flowing into other high-yield assets like cryptocurrencies and gold. This shift signals a new challenge to the dollar’s dominance.

USD Outlook for 2025: High Volatility Followed by Gradual Pressure

Based on the current macro environment, several key variables warrant attention:

Aggressive trade policies are bearish for the dollar. The US is becoming increasingly aggressive in trade, not just targeting individual countries but engaging in tariff wars globally. This could reduce commercial exchanges with the US, weakening dollar demand.

De-dollarization trend continues to deepen. Many countries are reducing their reliance on the dollar, and gold prices are rising, reflecting a pursuit of alternatives to the dollar.

Overall, bearish factors outweigh bullish ones. The dollar index is highly likely to oscillate at high levels over the next year before gradually weakening, but a sharp, one-way depreciation is unlikely.

A detail often overlooked: although the US is cutting rates, other components of the dollar index (excluding JPY) are also starting to lower rates. The pace and extent of rate cuts among these currencies directly determine their relative strength. For example, if the European Central Bank delays rate cuts while the Fed continues lowering, the euro may appreciate against the dollar, putting pressure on the USD.

Another risk to consider is geopolitical conflicts. With frequent hotspots around the world, any new geopolitical crisis or financial storm could trigger a flight into the dollar—because the dollar’s fundamental attribute is “safe-haven currency.”

How high can the dollar go? There is no absolute answer, but based on historical data, the dollar index once surged past 114 in 2023. Given the current rate-cut environment, breaking this level is unlikely; the dollar is more likely to oscillate between 100 and 110.

The Link Between USD Trends and Other Assets

Gold benefits significantly. When the dollar weakens, gold demand usually rises—since gold is priced in dollars, a weaker dollar makes gold cheaper for holders of other currencies. The environment of rate cuts also enhances gold’s appeal, as gold has no interest income, and when other assets’ yields decline, gold’s opportunity cost diminishes.

Stock markets face a double-edged sword. US rate cuts and liquidity injections favor tech and growth stocks. But if the dollar weakens excessively, foreign investors might shift their capital to Europe, Japan, or emerging markets, reducing inflows into US equities.

Cryptocurrencies are expected to benefit. Dollar depreciation generally reduces purchasing power, boosting demand for inflation-hedging assets. Bitcoin, as “digital gold,” is often viewed as a store of value during economic turbulence, dollar depreciation, or rising inflation.

Performance differences among major currency pairs are evident:

In USD/JPY, the Bank of Japan has ended its ultra-low interest rate policy, and capital may flow back into the yen. The likelihood of yen appreciation and USD/JPY depreciation is high.

For the TWD, although Taiwan’s interest rate policy follows the dollar’s movements, domestic housing market controls may limit rate cuts. Given Taiwan’s export-driven economy, a relatively low exchange rate benefits trade, so the TWD is expected to appreciate modestly.

Regarding the euro, despite recent relative strength, Europe’s economy faces significant challenges—persistent inflation without growth. If the European Central Bank gradually cuts rates, the euro may weaken against the dollar, but the extent will be limited.

Practical Investment Tips: How to Find Opportunities Amid USD Fluctuations

The strength or weakness of the dollar directly impacts investment returns, asset allocation, and long-term wealth planning. This rate-cut cycle will reshape capital flows.

In the short term, before and after monthly CPI releases, the dollar index often experiences significant volatility—these are prime opportunities for long or short positions. Investors can analyze market expectations versus actual data around key economic releases.

Long-term, the most crucial principle is “uncertainty equals opportunity.” Geopolitical tensions, unexpected central bank shifts, or economic data surprises can open new trading opportunities. The key is to prepare in advance, understand the logic behind USD movements, rather than following the herd passively.

For systematic trading of USD and related assets, choosing a platform that supports 24-hour trading with low costs is essential, enabling investors to capture every opportunity in the global markets.