How will the US dollar perform in the second half of the year? In-depth analysis of the 2025 exchange rate landscape

The “Crossroads” Facing the US Dollar

Entering 2025, the US dollar is at a critical turning point. As of the past week, the dollar index has been steadily declining to around 103.45, hitting a new low since November. More notably, the index has broken below the 200-day moving average, which is often interpreted by the market as a bearish signal.

What are the core factors driving the dollar’s weakness? The answer points to expectations of Federal Reserve monetary policy. The latest US employment data fell short of expectations, leading the market to increase bets on multiple rate cuts by the Fed. As Treasury yields continue to decline, the attractiveness of the dollar is beginning to diminish.

Historical Cycle Perspective: The Eight “Life-and-Death Cycles” of the Dollar

To understand the present, we must look back. Since the collapse of the Bretton Woods system in 1971, the dollar index has experienced eight distinct phases:

1971-1980: Disorderly Decline
Nixon announced the end of the gold standard, ushering in an era of dollar oversupply. Subsequently, oil crises and high inflation caused the dollar index to fall below 90.

1980-1985: Strong Rebound
Volcker wielded the “big rate hike” stick, pushing the federal funds rate to 20% and maintaining it at 8-10% for a long period, driving the dollar index to historic highs.

1985-1995: Decade of Bear Market
The twin deficits (fiscal and trade) persisted, leading the dollar into a prolonged depreciation cycle.

1995-2002: Internet Boom
During Clinton’s era, the US economy accelerated, capital flowed back rapidly, and the dollar index once touched 120.

2002-2010: Crisis Baptism
The bursting of the internet bubble, 9/11 shocks, and the financial crisis caused the dollar index to plunge to around 60 at the bottom.

2011-2020 Early: Relative Safe Haven
The European debt crisis erupted, emerging markets experienced volatility, and US stability was highlighted, pushing the dollar index back to high levels.

2020-2022 Early: Pandemic Turning Point
Zero interest rates plus unlimited QE led the US to “print money” to combat the pandemic, causing the dollar index to fall sharply and triggering global inflation.

2022 Early - End of 2024: Peak of Rate Hikes
To control inflation, the Fed launched its most aggressive rate hike cycle in 25 years, simultaneously shrinking its balance sheet (QT). Although inflation was gradually tamed, the confidence foundation of the dollar was once again challenged.

The “Mixed Bull and Bear” Situation of the Dollar in 2025

Based on technical, fundamental, and expectation signals, the dollar’s trend in the second half and throughout 2025 will feature the following characteristics:

Short-term (Q1-Q2): Mainly Range-bound Fluctuations
Bullish triggers: Sudden geopolitical risks (e.g., escalation in Taiwan Strait), may cause the dollar index to quickly rebound to 100-103; unexpectedly strong US employment or GDP data could delay rate cuts, leading to a dollar rebound.

Bearish triggers: The Fed begins rate cuts while the ECB’s policy remains lagging, causing the euro to strengthen and drag the dollar index below 95; deteriorating liquidity in the Treasury market and widening dollar credit spreads.

Medium to Long-term (Q3 and beyond): Likely Mild Weakening
If the Fed indeed enters a rate-cutting cycle, Treasury yields will fall, and dollar asset yields will decline relative to other assets. Funds will gradually shift toward high-growth emerging markets or the recovering Eurozone. Additionally, the global de-dollarization trend (e.g., BRICS countries promoting local currency settlement) will gradually erode the dollar’s reserve currency status, though not immediately.

The 2025 Landscape of Major Currency Pairs

EUR/USD: Beneficiary in a Weak Dollar Environment
The classic tug-of-war between the euro and the dollar index is evident. Currently, EUR/USD has risen to 1.0835, with technical prospects suggesting a test of the 1.0900 psychological level. If the ECB’s easing remains delayed and Europe’s economy stabilizes, a breakout above this level is likely.

GBP/USD: Winner from Policy Divergence
The Bank of England’s slower pace of rate cuts compared to the Fed provides relative support for the pound. GBP/USD is likely to fluctuate between 1.25 and 1.35, driven mainly by policy divergence and risk appetite. If the economic paths of the UK and US further diverge, the pound could even break through 1.40.

USD/CNY: Range-bound with Two-way Volatility
The movement of USD/CNY depends on the relative macroeconomic policies and fundamentals of both countries. Currently, it is range-bound between 7.2300 and 7.2600, lacking momentum for a breakout. Short-term focus should be on key support and resistance levels.

USD/JPY: Downward Pressure Increasing
Japan’s wage growth hit a 32-year high (January YoY +3.1%), inflation expectations are rising, and the Bank of Japan may gradually begin rate hikes. This will weigh on USD/JPY. Technically, a break below 146.90 opens further downside; reversing the downtrend requires reclaiming 150.0 resistance.

AUD/USD: Supported by Strong Data
Australia’s Q4 GDP exceeded expectations, and January’s trade surplus hit a new high of 56.2 billion. The Reserve Bank remains cautious about rate hikes, keeping the Australian dollar relatively firm. In a potential weakening dollar environment, AUD/USD has strong upward momentum.

How Should Investors Respond?

Aggressive Strategy:
Engage in high-low trading of the dollar index between 95-100, using technical tools like MACD and Fibonacci to identify reversal points.

Conservative Strategy:
Wait patiently for the Fed’s policy clarity before making directional bets. During this period, focus on currency pairs with lower volatility.

Medium to Long-term Allocation:
Gradually reduce dollar long positions and shift toward undervalued non-US currencies (e.g., yen, Australian dollar) or assets linked to commodities (gold, copper).

The dollar’s performance in the second half of the year will heavily depend on “data-driven” developments and “event reactions.” Flexibly adjusting positions and strictly following discipline will be key to capturing opportunities amid exchange rate fluctuations.