The night before the USD plummet: 2025 US dollar cycle turning point and the three key mechanisms investors must know

The United States launched a rate-cutting cycle in September 2024. This seemingly simple policy shift could trigger a wave of US dollar declines, reshaping the global asset allocation landscape.

Simply put, a rate cut means money becomes cheaper. When US interest rates fall, capital seeks higher yields elsewhere, and the attractiveness of the dollar diminishes accordingly. According to the latest dot plot forecasts, the Federal Reserve aims to bring the US dollar interest rate down to around 3% before 2026. For investors, this presents both trading opportunities and hidden risks.

However, there is a key misconception: Rate cuts ≠ necessarily a big drop in the US dollar. The strength of the dollar is not determined by a single factor but by multiple forces pulling in different directions.

What is being overlooked about the three main drivers of the US dollar exchange rate?

Many people only see the linear logic of “dollar rate cut → dollar plummets,” but the real market is far more complex.

First layer: Expectations game of interest rate policies

Many investors make a timing mistake—they think the dollar will only weaken after a rate cut. In reality, the market is highly efficient and has already priced in expectations when they form. So the focus is not on “rate cut has occurred,” but on “market’s understanding of the future rate cut trajectory.” Every update to the dot plot can instantly rewrite the dollar’s trend.

Second layer: The invisible force of dollar supply

Quantitative easing (QE) and quantitative tightening (QT) seem like technical operations, but they directly affect the scarcity of dollars. When the Fed increases dollar supply, downward pressure on the dollar appears; when it reduces supply, upward momentum is activated. But these changes are lagging and won’t be reflected immediately on the day of policy announcements.

Third layer: Policy choices of competitors

This is a critical oversight. The US dollar index is not a solo performance; it is relative to a basket of currencies. If the European Central Bank cuts rates faster than the Fed, the euro will appreciate, and the dollar’s decline will accelerate; the opposite is also true.

Underestimated risk of dollar depreciation: the de-dollarization wave

Since the US abandoned the gold standard, the dollar’s dominance has been unassailable. But over the past decade, this monopoly has been gradually eroded.

The rise of the eurozone, RMB, crude oil futures, and cryptocurrencies are all nibbling away at the dollar’s influence. Since 2022, many countries have begun to lose confidence in US debt and the dollar, shifting towards gold reserves. This is not accidental but part of a systemic de-dollarization trend.

If the US cannot effectively restore international confidence, dollar liquidity may face long-term pressure. This is why the US has become more cautious than ever with interest rate and QE policies.

Currently, there are far more bearish factors for the dollar than bullish ones:

• Escalation of trade wars: US tariffs on global trade reduce demand for the dollar
• Continued de-dollarization, with gold prices rising
• Increasing geopolitical uncertainties

Based on these factors, the probability of a significant dollar decline in the future is indeed rising, but it will not be a one-way rapid fall. More likely, it will be a slow weakening after oscillating in high ranges.

Historical lessons: the dollar repeatedly being bearish in crises

Over the past 50 years, the dollar has faced numerous “death predictions,” but it always survived.

During the 2008 financial crisis, market panic led to a massive flight into the dollar, causing it to appreciate rather than depreciate. In 2020, during the pandemic, the US printed money on a large scale, causing a brief weakening of the dollar, but as the economy recovered, it rebounded quickly. In 2022-2023, aggressive rate hikes pushed the dollar index above 114, a high not seen in over a decade.

What does this tell us? The dollar is fundamentally a safe-haven currency. As long as geopolitical or financial risks re-emerge, capital will instinctively flow back into the dollar.

The current forecast suggests a high probability that the dollar index will “oscillate at high levels and then weaken” over the next year, but not a straight decline. Cautious investors should prepare for sudden risks.

Chain reactions of a major dollar decline across various assets

Gold market: the most direct beneficiary

A sharp decline in the dollar means lower costs for buying gold with USD, increasing demand. Meanwhile, rate cuts reduce the holding cost of gold (which has no interest income), making it relatively more attractive.

Stock markets: increased divergence

A weaker dollar will attract funds into equities, especially tech and growth stocks. But if the dollar becomes too weak, foreign capital may shift to Europe, Japan, or emerging markets, reducing the inflow into US stocks.

Cryptocurrencies: rising as inflation hedges

A falling dollar means declining purchasing power of USD. In this context, Bitcoin, as “digital gold,” will garner more attention. During global economic turmoil, dollar depreciation, and rising inflation, demand for Bitcoin as a store of value surges.

Practical observation of major exchange rates

USD/JPY (US dollar vs. Japanese yen)

Japan has ended its ultra-low interest rate era, and capital is flowing back into Japan, pushing up the yen. The likely trend is yen appreciation and USD depreciation against JPY—this is the highest probability direction for next year.

TWD/USD (Taiwan dollar vs. US dollar)

Taiwan’s interest rates follow the US, but domestic policy goals are complex (balancing housing market issues and export demand). During the US rate cut cycle, the TWD is expected to appreciate, but the extent will be limited.

EUR/USD (Euro vs. US dollar)

Europe’s economy is weak, but inflation remains high. If the European Central Bank adopts a cautious rate cut strategy, the dollar’s decline will be limited. Currently, the euro remains relatively weak against the dollar, but this pattern is changing.

The essence of the US dollar exchange rate: a one-to-one relative value game

Many mistakenly equate “weakening dollar index” with “comprehensive dollar depreciation,” which is a thinking trap. The dollar index reflects the dollar’s relative performance against a basket of currencies; the actual exchange rate is a bilateral game.

The US may devalue against the euro while appreciating against the yen. Investors need to analyze pairwise, not just look at the index.

Practical strategies to seize the dollar’s big decline cycle

In the short term, every month’s CPI releases and employment data can cause sharp fluctuations in the dollar index. These timing points are opportunities for short-term traders.

But more importantly, understanding the big cycle logic: we are currently in the early stage of a rate-cutting cycle, with downward pressure on the dollar accumulating, but risk events can reverse the situation at any time. As long as uncertainty exists, trading opportunities will also exist.

The key is not to be trapped by a single narrative. Recognize both the long-term depreciation pressure on the dollar and leave room for sudden risk aversion reversals. This balanced thinking is the wisdom for surviving in the new dollar cycle.