The depreciation of the US dollar in 2025 is surging｜Exchange rate trends and trading strategies under the interest rate cut cycle

By the end of 2024, the Federal Reserve has initiated a long-anticipated rate-cutting cycle. According to the latest dot plot, the US interest rate target will be lowered to around 3% before 2026. What does this turning point mean? Simply put, money becomes cheaper, and capital will seek higher returns elsewhere, putting downward pressure on the US dollar.

But the market is much more complex than you think. The US dollar remains the world’s primary settlement currency; it is indispensable for trade clearing, foreign exchange reserves, and commodity pricing. Therefore, whenever the Fed moves a finger, the entire global financial system trembles. For investors, this is both an opportunity and a test.

The Engine of US Dollar Depreciation: How Interest Rate Policies Lead Exchange Rates

Interest rates are the most direct driver of the US dollar exchange rate. High interest rates attract capital into dollars, while low rates cause funds to seek other places. But here’s a key point: the market always leads reality.

Investors cannot just look at current rate hikes or cuts; they must analyze the market’s expectations of future policy directions. The US dollar market is highly efficient; it won’t wait until the Fed actually cuts rates for the dollar to weaken, nor until rate hikes are confirmed for the dollar to rise. That’s why the dot plot is so important—it reflects future policy expectations that the market has already priced in.

Currently, expectations of rate cuts are brewing a wave of US dollar depreciation. At the same time, major economies like Europe and Japan are also considering rate cuts. The key here is: who cuts faster, and who cuts more, directly determines the relative strength of the exchange rate.

Changes in US Dollar Supply: The Hidden Power of QE and QT

Quantitative easing (QE) and quantitative tightening (QT) may seem like technical central bank operations, but they actually determine the “scarcity” of US dollars in the market.

When the Fed implements QE, dollar inflows flood the market, diluting its value; during QT, dollars are withdrawn, reducing supply. In theory, QT should support dollar appreciation, but investor reactions often lag. That’s why closely monitoring Fed policy signals is crucial—markets need time to digest these signals, and savvy traders will position themselves in advance.

The Invisible Hand Behind US Dollar Depreciation: The De-dollarization Wave

In recent years, the biggest variable affecting the dollar’s trend is the global reassessment of its status.

The US has maintained a long-term trade deficit, importing more than exporting, which impacts short-term demand for the dollar. Deeper issues include: America’s creditworthiness and international influence are being tested.

Since the collapse of the Bretton Woods system in the 1970s, the dollar has maintained hegemony through US political, economic, and military advantages. But this dominance is being eroded. The eurozone’s formation, the rise of the renminbi crude oil futures, and the emergence of cryptocurrencies are challenging the dollar’s absolute position. Especially since 2022, the de-dollarization trend has accelerated, with many countries buying gold, reducing US Treasuries, and trying to settle transactions in their own currencies.

This wave of de-dollarization exerts long-term bearish pressure on the dollar. If the US cannot effectively rebuild international confidence, the dollar’s liquidity may gradually decline in the future, reinforcing the depreciation trend.

Historical Perspective: Fifty Years of Dollar Cycles and Key Events

Over the past half-century, the dollar index has experienced eight major cycle turning points. Each corresponds to a global economic shock:

• 2008 Financial Crisis: markets panicked, capital flocked to the safe haven of the dollar, causing a sharp appreciation.
• 2020 Pandemic: US government pumped money into the economy, temporarily weakening the dollar. But as the economy reopened, the dollar rebounded quickly, reaching new highs during the subsequent rate hike cycle.
• 2022-2023 Aggressive rate hikes by the Fed pushed the dollar against most currencies, with the dollar index surpassing 114.
• 2024-2025 Rate cuts began, and the dollar’s attractiveness started to decline. Capital shifted into gold, cryptocurrencies, and other assets to hedge against depreciation, putting downward pressure on the dollar.

The Actual Outlook for the USD Exchange Rate in 2025: High-Level Fluctuations or Steady Decline?

A simple prediction of “rate cuts = dollar decline” is naive. Reality is far more complex.

Currently, there are several bearish factors for the dollar:

• US trade policies are becoming more aggressive, engaging in tariff wars globally, which may reduce business willingness and hurt the dollar.
• De-dollarization continues, with gold prices rising, reflecting waning confidence in the dollar.
• Geopolitical risks frequently erupt, increasing uncertainty.

Based on these factors, the dollar index is more likely to “oscillate at high levels and gradually weaken” over the next year rather than plummet in a straight line.

But investors must not ignore a fundamental fact: The dollar is inherently a “safe-haven currency.” When a financial crisis or severe geopolitical risks erupt, capital will flow back into the dollar. This can trigger short-term rebounds.

Additionally, among the major currencies in the dollar index, currencies other than the yen are also cutting rates. Who cuts faster, and whose economy is more resilient, directly influences relative exchange rate movements. For example, if the US cuts rates faster than Europe, the euro may appreciate, and the dollar weaken relative to the euro.

Asset Allocation Insights in the Era of Dollar Depreciation

The dollar’s trend is not just a game for forex traders; it directly impacts your investment returns and asset allocation decisions.

Gold: A weakening dollar boosts gold demand. Gold is priced in USD; a weaker dollar means lower costs to buy gold in other currencies. Additionally, rate cuts reduce the opportunity cost of holding gold (which pays no interest), further increasing its appeal.

Stock Markets: Rate cuts attract capital into equities, especially tech and growth stocks. But if the dollar becomes too weak, foreign investors might shift to Europe, Japan, or emerging markets, weakening US stock attractiveness.

Cryptocurrencies: A declining dollar generally benefits crypto assets. Bitcoin, often called “digital gold,” is especially favored during dollar depreciation or global economic turmoil, as it’s seen as a hedge against inflation.

Major Currency Pairs:

• USD/JPY: Japan has just exited ultra-low interest rates, and capital inflows could push the yen higher. USD/JPY may weaken.
• TWD/USD: The Taiwan dollar may appreciate but with limited scope, as Taiwan’s export-driven economy means a stronger currency isn’t necessarily positive.
• EUR/USD: The euro remains relatively strong, but European economic weakness suggests that if both sides cut rates, the dollar’s decline will be controlled.

Seizing Volatility: Practical Trading Strategies

USD exchange rate fluctuations create trading opportunities. In the short term, every key economic data release can trigger sharp swings. For example, around monthly CPI reports, the dollar index often experiences significant volatility—ideal for short-term traders.

The key is timing—quickly analyzing technical and fundamental signals and making decisive long or short positions.

Long-term, the de-dollarization trend and US economic fundamentals will be the core variables determining the dollar’s direction. But in the short term, every unexpected event, economic data release, or geopolitical conflict can serve as a trigger.

Remember: the higher the uncertainty, the greater the opportunity. In the context of dollar depreciation, volatility is the source of profit—what matters is whether you are prepared to seize it.