## Why Will the US Dollar Continue to Depreciate in 2025? How the Rate Cut Cycle Is Reshaping Global Exchange Rate Patterns

Talking about recent market trends, investors’ most intuitive feeling is: **Why has the US dollar been falling?** Indeed, since the Federal Reserve began its rate cut cycle in September 2024, the US dollar index has shown high-level fluctuations and weakening. What underlying investment logic is hidden behind this? Today, we will fundamentally decode the secret behind this dollar decline.

## The Fundamental Logic Behind the Continuous Depreciation of the US Dollar

Simply put, **rate cuts are like giving the market a calming injection**—money becomes cheaper, and capital naturally seeks higher returns. When US interest rates decline, funds that were previously attracted to dollar assets start flowing into stocks, gold, cryptocurrencies, and other risk assets, significantly reducing the dollar’s attractiveness.

According to the latest Fed dot plot expectations, **the goal of this rate cut cycle is to bring US interest rates down to around 3% before 2026**. This means the market should be prepared for a long-term mindset of a weakening dollar.

But here’s the question—**why does the dollar depreciate when rates are cut?** This is not a simple cause-and-effect relationship. The forex market is efficient; it does not wait for the Fed to actually start cutting rates to react but prices in expectations in advance. From the moment the Fed signals a rate cut, the entire market begins pricing in dollar depreciation.

## Factors Determining the US Dollar Exchange Rate: Understanding These Four Logical Layers

### Interest Rate Policy: The Direct Driver of Dollar Strength

When interest rates are high, the dollar is like a high-yield deposit product, attracting capital; when rates are low, the investment value of the dollar diminishes. **But there’s a detail investors often overlook: the market focuses not on current rates but on the trend of future interest rates.**

That’s why experienced traders pay close attention to the Fed’s dot plot—it reflects officials’ expectations of future interest rate paths. Once expectations change, exchange rates can reverse instantly.

### Money Supply: The Invisible Hand of QE and QT

When the Fed implements quantitative easing (QE), a flood of dollars enters the market, increasing supply and inevitably leading to dollar depreciation; conversely, quantitative tightening (QT) reduces dollar supply, theoretically pushing the dollar higher.

However, such changes often take time to fully reflect in exchange rates. **Investors must learn to distinguish between policy signals and the time lag of actual effects.**

### Trade Imbalance: The Long-term Tug-of-War of Imports and Exports

The US has maintained a **trade deficit** for a long time—imports far exceed exports. An increase in imports means more dollars are needed to pay for foreign goods, supporting the dollar; conversely, an increase in exports reduces demand for dollars.

However, these effects are usually slow variables, and short-term impacts are hard to observe clearly.

### US Credit Crisis: The Potential Long-term Threat

This is the most easily overlooked yet strategically significant factor. **The reason the dollar can become the global settlement currency fundamentally stems from global trust in the US.** But this trust is being eroded.

Since the US abandoned the gold standard, the global financial system centered on Fed policies has faced challenges. The emergence of the euro, the launch of yuan crude oil futures, the rise of virtual currencies—all are gradually undermining the dollar’s absolute dominance.

Especially since 2022, **de-dollarization waves have accelerated**. More countries are questioning the safety of the dollar and US Treasuries, shifting towards holding gold and other assets. This phenomenon reflects deep changes in the global political and economic landscape, exerting latent but persistent pressure on the dollar’s long-term depreciation.

## The Historical Cycle of the US Dollar Exchange Rate: From the Bretton Woods System to De-dollarization

Reviewing the dollar index over the past 50 years, we can identify several key turning points:

**2008 Financial Crisis** — Amid global panic, capital flooded into the dollar for safety, causing a rapid appreciation.

**2020 COVID-19 Pandemic** — The US government injected massive liquidity to stimulate the economy, temporarily weakening the dollar, but as the US economy recovered and led globally, the dollar rebounded strongly.

**2022-2023 Aggressive Rate Hikes** — The Fed raised rates sharply to combat inflation, with the dollar index once surpassing 114, reaching a peak in the past two decades.

**2024-2025 Rate Cut Cycle** — As inflation gradually comes under control, the Fed shifts stance, weakening the dollar’s appeal, with funds flowing into gold, cryptocurrencies, and alternative assets.

These turning points reflect shifts in global economic cycles and risk sentiment. In the long run, **de-dollarization trends and the relative decline of the US economy will be key variables influencing the dollar’s future.**

## When Will the US Dollar Bottom Out? Exchange Rate Forecasts for 2025-2026

Currently, the negative factors affecting the dollar outweigh the positive ones, but this does not mean the dollar will decline unilaterally:

**Negative Factors:**
- Increasingly aggressive US trade conflicts, potentially reducing business dealings with the US
- Continued de-dollarization, with gold and alternative assets attracting more capital
- The rate cut cycle itself diminishes the dollar’s yield attractiveness

**Reversal Risks Not to Ignore:**
- Frequent geopolitical conflicts; if a new financial crisis erupts, capital will instinctively flee to the dollar
- **The dollar remains fundamentally a “safe-haven currency,” and during crises, safe-haven demand can reverse the depreciation trend**

**Market Structure Variables:**
This is especially important—**among the components of the dollar index, besides the yen, other major currencies (euro, pound, CAD, etc.) are also in rate-cut cycles. The faster and more aggressive the rate cuts, the more it influences relative exchange rates.**

For example, if the European Central Bank hesitates to cut rates while the US continues to do so, the euro may appreciate against the dollar, leading to a weaker dollar. Conversely, the opposite can happen.

**Overall assessment: The probability that the dollar will “oscillate at high levels and gradually weaken” in 2025-2026 is higher, but a sharp, one-way decline is less likely.** In the short term, every economic data release and central bank official’s statement can trigger volatility. Investors should remain alert to black swan events that could cause rapid reversals.

## Chain Reactions of the US Dollar Trend on Major Asset Classes

### Gold and the US Dollar: An Inverse Relationship

Gold is priced in dollars; when the dollar depreciates, the cost of buying gold decreases, increasing demand—this is a classic inverse relationship.

Additionally, rate cuts reduce the opportunity cost of non-yielding assets like gold, further boosting gold’s appeal. Over the next year, **gold is likely to be the most direct beneficiary of dollar depreciation.**

### The Dual Nature of the Stock Market

Rate cuts generally stimulate stock markets, especially technology and growth stocks. But if the dollar depreciates too quickly, foreign investors might shift funds to Europe, Japan, or emerging markets, weakening the inflow into US stocks. This is a risk investors need to monitor.

### Cryptocurrency as an Inflation Hedge

A weakening dollar means a decline in its purchasing power, which is a key reason investors allocate assets like Bitcoin. **Bitcoin is often called “digital gold,” and during periods of dollar depreciation and global economic turbulence, it is viewed as a store of value.**

### Diverging Trends of Currencies Against the US Dollar

**USD/JPY:** Japan has just ended its ultra-low interest rate era, and capital is starting to flow back into Japan. The yen is likely to appreciate, and USD/JPY may weaken.

**USD/TWD:** Taiwan’s interest rate policy roughly follows the Fed, but domestic economic considerations (real estate regulation, export orientation) will limit rate cuts. Therefore, **the New Taiwan dollar may gradually appreciate, but with limited scope.**

**EUR/USD:** The euro currently performs relatively strongly against the dollar, but European economic conditions are concerning—high inflation and weak growth. If the European Central Bank also cuts rates, the dollar’s depreciation will be limited.

## How to Find Investment Opportunities During the Dollar Depreciation Cycle

This rate cut cycle is not just simple economic news but a major capital flow migration. Investors’ response logic should be: **Instead of passively enduring exchange rate fluctuations, it’s better to proactively position for the trend.**

**Short-term trading strategies:** Before and after monthly CPI releases, during FOMC meetings, the dollar index often experiences significant volatility. Experienced traders can leverage these moments for short-term long or short positions.

**Medium-term allocation strategies:** Expecting dollar weakness, moderately increase allocations in gold, diversified currency assets, and growth stocks to hedge against dollar risk.

**Core investment philosophy:** Remember a fundamental truth—**as long as uncertainty exists, investment opportunities will also exist.** The key is to correctly identify risks and seize the right timing. The dollar depreciation cycle is such an opportunity window; those who adapt early to the new market rhythm can profit from the reallocation of capital flows.