2025 USD Trend Forecast: Does a Rate Cut Really Equal a Weakening Dollar? You Might Be Thinking Too Simply

Will the US dollar crash in 2024 when the Fed starts cutting rates?

Many people get anxious when they see this news. But in reality, this logic is full of flaws.

First, clarify: The US Dollar Index and USD exchange rates are not the same thing

The first step in predicting the dollar’s movement is understanding what the US Dollar Index actually measures.

Simply put, the US Dollar Index gauges the strength of the dollar relative to a basket of major currencies. It is not a specific exchange rate but a weighted average of the dollar against euro, yen, pound, Canadian dollar, Swiss franc, and Swedish krona.

In contrast, a single exchange rate like USD/JPY or EUR/USD is a “one-on-one showdown” between the dollar and a specific currency.

This is very important because a rate cut by the Fed does not necessarily lead to an immediate decline in the US Dollar Index. The key lies in what other central banks are doing. If the European Central Bank also cuts rates, and at the same pace, the Dollar Index won’t weaken significantly. Who cuts faster and more aggressively is what truly determines exchange rate strength.

Four main drivers to watch for USD trend prediction

1. Interest rate policy: The game of interest rate differentials

Higher interest rates attract capital. When US rates are attractive, global funds scramble to exchange for dollars to seek gains in the US market. Conversely, when rates are cut, the dollar’s attractiveness naturally declines.

But there’s a trap: Markets always price in policy expectations ahead of actual moves. Investors won’t wait until the Fed actually cuts rates to start selling dollars; they act based on expectations. So, to analyze the dollar index, look at the Fed’s dot plot, not just the current interest rate figures.

According to the latest forecasts, the Fed plans to cut rates to around 3% by 2026. This expectation is already partly priced into the exchange rate.

2. USD supply (QE vs QT): The power of the printing press

When the Fed injects liquidity (QE), the amount of dollars in the market surges, leading to a weaker dollar. When the Fed tightens (QT), the dollar supply decreases, which can actually lead to appreciation.

Similarly, these changes don’t reflect immediately in prices but take time to digest. Investors must closely monitor the Fed’s policy stance.

3. Trade deficit: America’s structural issue

The US has a long-term trade deficit, importing more than it exports. Increased imports require more dollars, which pushes the dollar higher; increased exports reduce dollar demand, leading to dollar sales.

However, this impact is usually long-term and doesn’t cause overnight exchange rate changes.

4. US global credit and competitiveness: The invisible strength

The dollar’s status as the world’s reserve currency is rooted in global trust in the US. But that trust is now being eroded.

Over the past decades, de-dollarization has become more evident. The rise of the euro, the launch of yuan crude oil futures, the growth of cryptocurrencies, and countries hoarding gold—all challenge dollar hegemony. Especially since 2022, many nations have lost confidence in US Treasuries and shifted toward gold.

If the US cannot rebuild global confidence in the dollar, its liquidity may continue to decline. This is why the Fed has become increasingly cautious with rate decisions.

A 50-year review: How major events rewrote the dollar index

Looking back half a century, the dollar’s movement has been shaped by major economic events:

2008 Financial Crisis: Global panic led to capital flight into the dollar, causing a sharp appreciation and exemplifying the dollar as a “safe haven.”

2020 Pandemic: The US government printed money aggressively to rescue the economy, temporarily weakening the dollar. But as the US economy recovered first, the dollar rebounded strongly, attracting global capital again.

2022-2023 Rate Hike Cycle: The Fed aggressively raised rates to combat inflation, pushing the dollar against major currencies to extreme levels, with the dollar index surpassing 114 at times.

2024-2025 Rate Cut Cycle: Now, the situation has reversed. The Fed has started cutting rates, reducing the dollar’s appeal. Capital is flowing into higher-yield assets like cryptocurrencies, gold, and emerging market stocks.

Future USD trend forecast: Not a continuous crash, but high-level oscillation

Many assume that “rate cuts” mean the dollar will plummet sharply. But the reality is more complex.

Currently, the factors bearish for the dollar are relatively numerous:

• US tariffs and trade policies are becoming more aggressive, raising costs for doing business with the US and potentially reducing demand
• De-dollarization continues, and global reliance on the dollar diminishes
• Rate cut expectations are already priced in; no new catalysts for depreciation are apparent in the short term

But don’t be overly optimistic, because a key variable remains: geopolitical risks. Conflicts in Israel and Palestine, Taiwan issues, Russia-Ukraine tensions… Whenever crises erupt somewhere, global funds tend to flow back into the dollar, as it remains the “king of safe havens.”

The author believes that in the next year, the most likely trend for the dollar index is “oscillation at high levels followed by gradual weakening,” rather than a one-way plunge. This suggests investors should avoid betting on outright shorts and instead make precise judgments based on specific currency pairs.

Chain reaction of asset responses to USD fluctuations

Gold: When the dollar weakens, gold rises

Gold is priced in dollars. When the dollar depreciates, the cost of buying gold in dollars drops, increasing demand. Plus, rate cuts make gold more attractive (since gold has no interest, when other assets’ yields fall, gold’s opportunity cost decreases). This rate-cut cycle is a double boon for gold.

Stock Market: Capital will flow back in

US rate cuts typically stimulate capital inflows into stocks, especially tech and growth stocks. But if the dollar becomes too weak, foreign investors might shift to Europe, Japan, or emerging markets, dispersing the appeal of US equities.

Cryptocurrencies: A new hedge against inflation

A weakening dollar means declining purchasing power. In such an environment, investors seek assets to hedge inflation, with Bitcoin often dubbed “digital gold.” During global economic turbulence, dollar depreciation, or rising inflation, crypto markets usually see capital inflows.

Other major currency pairs: Each fights its own battle

USD/JPY (Dollar/yen): Japan just ended its ultra-low interest rate era, and yen funds are starting to flow back, pushing the yen higher. A strengthening yen and a weakening dollar are highly probable.

TWD/USD (New Taiwan dollar/US dollar): Taiwan’s interest rates follow the dollar, but domestic policies like housing restrictions limit capital flows. As Taiwan is export-oriented, a weaker currency benefits exports. Expect slight TWD appreciation, but not too much.

EUR/USD (Euro/US dollar): The euro is relatively strong now, but Europe’s economy faces issues (high inflation but weak growth). If the European Central Bank gradually cuts rates, the dollar will weaken slightly but not sharply.

How to profit from USD fluctuations

Once you understand the forecast for the dollar’s movement, the key is how to seize trading opportunities.

Short-term trading: Every economic data release (like CPI, employment figures) triggers exchange rate volatility. Skilled traders position themselves before and after these announcements to profit from short-term swings.

Medium-term positioning: Based on the Fed’s dot plot expectations and other central banks’ policies, plan ahead for currency directions. For example, if you expect the dollar to oscillate at high levels and weaken over the next year, you can gradually build short dollar or long other currencies positions.

Core investment logic: Whenever uncertainty exists, trading opportunities arise. The key is to act at the right time with the right analysis to capture these opportunities.

Final advice: Don’t be fooled by simplified logic like “rate cuts equal dollar collapse.” USD trend prediction requires a comprehensive analysis of interest rates, supply, trade, and global confidence. Only systematic analysis can help you profit steadily in the unpredictable forex market.