Can the US dollar rally continue? Analysis of the 2025 USD exchange rate trend and investment strategies

As the world’s primary settlement currency, the exchange rate of the US dollar influences every investor’s nerves. Since the start of the rate-cut cycle in September 2024, discussions about the dollar’s rise and fall have never stopped. Cutting interest rates means lower funding costs, which theoretically would weaken the dollar, but the actual situation is far more complex than imagined.

According to the latest FOMC dot plot forecast, the goal is to bring the US dollar interest rate down to around 3% by 2026. But the question remains: will the dollar still appreciate or depreciate? This is not a simple linear logic of “rate cuts necessarily leading to weakness,” but requires a comprehensive assessment of multiple factors.

What exactly is the US dollar exchange rate measuring?

The US dollar exchange rate is essentially the exchange ratio between the dollar and other currencies. For example, EUR/USD=1.04 indicates that 1 US dollar can be exchanged for approximately 1.04 euros. When EUR/USD rises, it means the euro is appreciating and the dollar is depreciating; vice versa.

It is worth noting that the US dollar index is influenced not only by US monetary policy but also by the policies and economic conditions of major economies like Europe and Japan. Therefore, a unilateral rate cut by the US does not guarantee a decline in the dollar index. This is a common mistake among investors—overestimating the impact of a single country’s policy.

Four core factors that determine the dollar’s rise and fall

1. Interest rate policy—The most direct driver

Interest rates are the most direct influence on the dollar. When rates are high, the attractiveness of the dollar increases, leading to large capital inflows; when rates are low, capital seeks higher returns elsewhere, and the dollar may weaken.

But there’s a detail investors often overlook: The market reacts in advance and does not wait until rate cuts are confirmed for the dollar to start falling. Before rate cuts, the market has already begun pricing in expectations of future moves. Therefore, investment decisions should not only consider current rate hikes or cuts but also focus on changes in market expectations.

2. US dollar supply—QE versus QT tug-of-war

Quantitative easing (QE) increases the supply of dollars in the market, lowering the dollar’s value; quantitative tightening (QT) reduces supply, usually pushing the dollar higher. However, these effects often do not manifest immediately, and investors need to continuously monitor the Federal Reserve’s policy stance.

3. Trade structure—Long-term hidden driver

The US has maintained a long-term trade deficit (imports greater than exports). Increased imports require more dollars for payments, which can push up the dollar; increased exports reduce dollar demand. However, such effects are usually long-term, with limited impact during short-term volatility.

4. Global confidence—The foundation of dollar dominance

The dollar’s status as a global reserve currency fundamentally stems from the world’s trust in US strength. But this trust is now wavering. De-dollarization is becoming increasingly evident, with many countries buying gold and developing local currency settlement systems. If the US cannot effectively restore international confidence, the dollar’s liquidity may continue to decline.

What does history tell us? The dollar cycles over the past 50 years

Tracing the performance of the dollar index:

• 2008 Financial Crisis: Market panic and capital flight to safe-haven assets, leading to a significant dollar rally
• 2020 Pandemic: Initial short-term dollar weakness, followed by a strong rebound as the US economy recovered first
• 2022-2023 Rate Hike Cycle: The Fed aggressively raised rates, strengthening the dollar against most currencies, with the dollar index once surpassing 114
• 2024-2025 Rate Cut Cycle: The Fed begins cutting rates, weakening the dollar, with capital shifting to cryptocurrencies and gold

These historical cases show that geopolitical events and economic crises often have a more intense impact on exchange rates than monetary policy itself.

USD fluctuations in 2025: Not a one-way trend

Based on the current situation, factors that are bearish for the dollar are accumulating:

Trade policy escalation: The US is expanding from a trade war with China to a global tariff war, which could dampen the willingness of US trading partners to do business with the US, negatively impacting the dollar.

De-dollarization continues: Central banks are increasing gold reserves, and emerging markets are developing non-dollar settlement mechanisms, weakening international demand for the dollar.

Geopolitical risks normalize: Conflicts in Ukraine, the Middle East, and elsewhere persist, and any new security threats could trigger a flight to safety into the dollar.

Major currencies simultaneously cut rates: This is an often-overlooked but crucial point—although the US is cutting rates, major currencies like the euro and yen are also lowering theirs. The pace and extent of rate cuts directly determine exchange rate strength. If the US cuts rates more than Europe, the euro may appreciate and the dollar depreciate.

Based on the above analysis, it is more likely that the dollar will oscillate at high levels in 2025 and gradually weaken, rather than experiencing a one-sided sharp depreciation. Whenever geopolitical crises or financial panics occur, safe-haven capital will still flow into the dollar—it remains fundamentally the strongest safe-haven currency.

How does the dollar trend affect other assets?

Gold: When the dollar depreciates, gold benefits. Since gold is priced in dollars, a weaker dollar lowers the purchase cost and boosts demand. Additionally, rate cuts reduce the opportunity cost of holding gold, providing a double benefit.

Stock markets: Rate cuts usually stimulate capital inflows into equities, especially tech and growth stocks. But if the dollar weakens excessively, foreign investors might shift to other markets, reducing the attractiveness of US stocks.

Cryptocurrencies: A weakening dollar means declining purchasing power, prompting investors to seek assets that hedge inflation, such as Bitcoin and other digital assets.

Major currency pair trends:

USD/JPY (US dollar vs. Japanese yen): Japan has ended its ultra-low interest rate policy, and capital may flow back into yen. The likelihood of yen appreciation and USD/JPY depreciation is higher.

TWD/USD (Taiwan dollar vs. US dollar): Taiwan’s interest rates follow US rates but with its own considerations (like real estate regulation). Given Taiwan’s export-driven economy, the TWD is expected to appreciate modestly, but with limited scope.

EUR/USD (Euro vs. US dollar): The euro remains relatively strong, but Europe’s economy is weak, and inflation remains high. If the European Central Bank gradually cuts rates, the dollar might weaken slightly, but a major depreciation is unlikely.

How to seize opportunities amid dollar fluctuations?

Every economic data release, central bank decision, or geopolitical event can trigger short-term exchange rate volatility. Investors skilled at capturing these fluctuations can find opportunities to go long or short. For example, CPI announcements often cause noticeable swings in the dollar index, which can be exploited for trading.

The key is to remember: uncertainty itself is an opportunity. Whether the dollar rises or falls depends on how you interpret these changing factors and their relative weights. During the 2025 rate-cut cycle, flexible strategies and continuous monitoring of multiple signals are essential for steady profits.