Is the US dollar's decline already a certainty amid the wave of interest rate cuts? A comprehensive analysis of the 2025 exchange rate trend and investment opportunities

The global economic landscape is undergoing a profound transformation. Since the start of the rate-cutting cycle in September 2024, the attractiveness of the US dollar has been quietly waning. What market mechanisms are behind this shift? What investment opportunities might arise?

According to the latest Fed dot plot, the goal is to bring interest rates down to around 3% before 2026. This policy shift means lower funding costs and increased market liquidity, fueling expectations of a weaker dollar. But will the US dollar really decline all the way? The answer is not that simple.

The Essence of the US Dollar Exchange Rate: More Than Just Two Currencies

Many investors oversimplify the understanding of the USD exchange rate. In reality, the exchange rate reflects the relative strength between two economies.

For example, EUR/USD represents the euro against the dollar. When EUR/USD rises from 1.04 to 1.09, it indicates that with the same amount of dollars, you can exchange for more euros—meaning the euro is appreciating and the dollar is depreciating. Conversely, the opposite is true.

But here’s a key point: The fluctuations of the US Dollar Index depend not only on US policies but also on the monetary policies and economic performance of other major economies. So, simply saying “US rate cuts lead to a weaker dollar” is inaccurate—if other countries cut rates more aggressively, the dollar might actually appreciate relative to them.

Four Major Factors Driving the USD Movement

1. Interest Rate Policies: Expectations vs. Reality

Interest rates are the most direct driver of the dollar, but there’s a common trap investors fall into—markets do not wait for policy confirmation before acting.

When the Fed is still considering rate cuts, the market begins pricing in those expectations. That’s why sometimes, after a rate cut announcement, the dollar can strengthen—because actual actions are less aggressive than market expectations. Investors need to pay attention to forward guidance like the dot plot, rather than only reacting to past events.

2. The Game of Money Supply

Quantitative easing (QE) increases dollar supply, theoretically weakening the dollar; quantitative tightening (QT) does the opposite. But these effects are not immediate—they unfold gradually over time.

Market participants must closely monitor changes in the Fed’s balance sheet and policy statements to position themselves early.

3. Long-term Drag of Trade Imbalances

The US has maintained a persistent trade deficit, meaning imports far exceed exports. When imports increase and settle in dollars, the dollar short-term appreciates; but in the long run, this imbalance erodes the dollar’s fundamentals.

4. US Creditworthiness and Global Status

This is the most overlooked yet crucial factor. The dollar’s status as the world’s primary settlement currency stems from global trust in the US.

However, this trust is being tested. Since 2022, the de-dollarization wave has accelerated—EU deepening monetary integration, the launch of RMB crude oil futures, and countries increasing gold reserves. If US credit continues to weaken, the long-term downtrend of the dollar will be hard to reverse.

What History Teaches Us About Predicting the USD?

Over the past 50 years, the dollar has experienced eight major cycles, with key events including:

• 2008 Financial Crisis: Panic-driven capital flows back into the dollar, causing the USD index to soar
• 2020 Pandemic: Massive US stimulus led to a brief dollar weakening, followed by a strong rebound during economic recovery
• 2022-2023 Rate Hike Cycle: Aggressive Fed rate hikes pushed the USD index to a record high of 114
• 2024-2025 Rate Cut Cycle: Expectations of dollar decline increased, with capital flowing into gold, cryptocurrencies, and other assets

These historical patterns tell us: USD movements are influenced by multiple intertwined factors; a single event cannot determine the direction alone.

2025 and Beyond: The Dollar Will Fall But Not Crash

Based on current conditions, the following factors are worth noting:

Bearish factors dominate

• Aggressive trade policies: US engaging in trade wars reduces the motivation for global businesses to trade with the US
• Continued de-dollarization: countries reducing US debt holdings and increasing gold reserves
• The beginning of a rate-cutting cycle: attractiveness diminishes significantly

But reversal risks exist

• Geopolitical risks: in case of financial crises or geopolitical conflicts, capital will still flow into the dollar as a safe haven
• Relative strength is key: whether the dollar falls depends not only on US policies but also on other major economies—who cuts rates faster and more aggressively will influence exchange rates

Therefore, in the next 12 months, the USD index is most likely to fluctuate at high levels and then gradually weaken, rather than plummeting sharply.

How Will a Falling Dollar Affect Different Assets?

Gold: Beneficiary

A weakening dollar lowers the cost of gold priced in USD, boosting demand. Coupled with the opportunity cost of rate cuts, gold’s appeal increases significantly.

Stock Markets: Opportunities and Risks

Initially, rate cuts will stimulate capital inflows, especially into tech and growth stocks. But if the dollar falls too quickly, foreign investors might shift to Europe, Japan, or emerging markets, potentially weakening US equities’ attractiveness.

Cryptocurrencies: Inflation Hedge

A falling dollar and rate cuts jointly reduce real purchasing power, prompting investors to seek inflation-resistant assets. Bitcoin, as “digital gold,” is often viewed as a store of value during economic turbulence and dollar depreciation.

Major Currency Pairs to Watch

USD/JPY: Japan has ended ultra-low interest rates, capital flows back into the yen, and an appreciation trend is evident.

TWD/USD: The Taiwan dollar follows US policy but maintains relative independence. As Taiwan is export-oriented, a low exchange rate benefits exports. When the dollar declines, the TWD is expected to appreciate mildly, with limited amplitude.

EUR/USD: The euro remains relatively strong against the dollar, but European economic difficulties, high inflation, and sluggish growth suggest the ECB’s rate cuts will not be too rapid, so the dollar is unlikely to depreciate sharply.

How to Profit During a Falling Dollar Cycle?

Instead of passively waiting, take proactive action. USD exchange rate fluctuations hide monthly trading opportunities—CPI releases, Fed meetings, geopolitical events—all can trigger significant volatility.

The key is to grasp the timing of information releases and make quick analyses and decisions. Remember a core principle: uncertainty often equals opportunity.

In the context of a broad dollar decline, diversifying assets—adding more gold, high-quality growth stocks, cryptocurrencies—and flexibly using exchange rate tools is the optimal strategy to navigate this rate-cutting cycle.