A panoramic view of the US dollar interest rate cut cycle | Exchange rate changes and investment opportunities in 2025

By the end of 2024, the US dollar will officially enter a rate-cutting cycle. This seemingly simple policy shift is quietly reshaping global capital flows. When US interest rates decline, where will the funds flow? Can emerging assets rise with the trend? For retail investors, this market movement is both a source of risk and opportunity.

The Core Logic of the US Dollar Exchange Rate

The US dollar exchange rate is essentially a game of “exchange weight” competition. When you see EUR/USD=1.04, it means you need 1.04 dollars to exchange for 1 euro. The larger the number, the weaker the dollar; the smaller the number, the stronger the dollar.

The US Dollar Index combines the overall strength of the dollar against six major currencies and is the best window to observe the dollar’s overall performance. It’s important to note that the US Dollar Index is driven not only by US policies but also critically by the monetary policies and economic performance of the countries whose currencies are included. Therefore, a simple rate cut by the US does not necessarily lead to a decline in the dollar index—comparison with other countries’ policy choices is essential.

Who Determines the Rise and Fall of the Dollar? Four Key Factors

Interest Rate Policy: The Most Direct Driver

High interest rates attract capital, low interest rates repel capital. This logic seems simple, but the market always leads policy by one step. Investors do not wait for the Federal Reserve to confirm rate cuts before turning bearish on the dollar, nor do they wait for rate hikes to turn bullish. The key is to anticipate market expectations in advance, often judged through forward-looking tools like the Fed dot plot.

According to the latest dot plot, the Fed aims to keep rates around 3% before 2026. Every change in expectations triggers early reactions in the forex market.

Liquidity Injection: The Invisible Hand of QE and QT

Quantitative easing (QE) and quantitative tightening (QT) are two tools the Fed uses to manage dollar supply. During QE, flood of dollars leads to depreciation pressure; during QT, dollars become scarce, and appreciation opportunities arise. However, these effects often lag and require investors to closely monitor the Fed’s long-term policy intentions.

International Trade Patterns: The Subtle Balance of Imports and Exports

The US’s long-term trade deficit (imports greater than exports) profoundly impacts dollar supply and demand. Increased imports require more dollars, pushing the dollar higher; weak exports reduce demand for dollars. These are long-term factors, often overshadowed by market noise in the short term.

US Power and Credit Foundation

The dollar’s dominance stems from America’s global hard power—economy, military, innovation. But this advantage has been eroded in recent years. The de-dollarization wave is spreading worldwide: the rise of the euro system, the launch of yuan crude oil futures, the rise of digital assets like Bitcoin—all challenge the dollar’s monopoly.

If the US cannot rebuild global confidence in the dollar, liquidity decline will become a long-term trend. This also explains why the Fed has become particularly cautious in its rate cut decisions.

Fifty Years of Dollar Fluctuations: Trends from Crises

Looking at the history of the dollar index, every major turning point stems from significant events:

• 2008 Financial Crisis: Panic-driven capital flows back into the dollar, causing a sharp appreciation
• 2020 Pandemic Shock: Massive US stimulus temporarily weakens the dollar, followed by a rebound due to economic recovery
• 2022-2023 Aggressive Rate Hikes: The Fed’s tough stance on inflation pushed the dollar index above 114
• 2024-2025 Rate Cut Initiation: Policy shift, capital outflows begin, pressure on the dollar

What’s Next? Key Predictions for the Dollar Exchange Rate

In the current market environment, factors bearish for the dollar outweigh bullish ones:

Trade War Escalation: US policies expanding from targeted confrontation (China) to comprehensive confrontation (globally) will reduce the attractiveness of US trade.

De-dollarization Accelerates: Gold continues to rise, central banks shift to other reserve assets, weakening demand for the dollar.

But risks never disappear: Geopolitical surprises, financial crises—funds will still flock to the dollar as a safe haven in times of turmoil.

More critically— the dollar itself is also cutting rates, and other major currencies are doing the same. Who cuts faster, who cuts more, directly determines who appreciates and who depreciates. For example, if the European Central Bank holds steady while the Fed aggressively cuts, the euro will naturally appreciate and the dollar weaken.

Overall judgment suggests that in the next year, the dollar index is more likely to “fluctuate at high levels and gradually weaken” rather than experience a sharp decline.

The Impact of Dollar Trends on Various Assets

Gold: The Most Direct Beneficiary

Dollar depreciation = lower gold purchase costs = increased demand. Additionally, in a low-interest-rate environment, gold’s appeal increases because it bears no interest, and opportunity costs decline significantly. This dual logic explains why gold rises when the dollar depreciates.

Cryptocurrencies: A New Safe Haven for Capital

When the dollar’s purchasing power declines and inflation expectations rise, the crypto market often receives positive stimuli. Bitcoin, as “digital gold,” is increasingly viewed as a store of value amid global economic turbulence and dollar weakness. Rate-cut cycles usually attract risk-tolerant investors to high-volatility assets like cryptocurrencies.

Stock Markets: A Double-Edged Sword

Rate cuts stimulate capital inflows, especially into tech and growth stocks. But if the dollar weakens excessively, foreign investors may shift to Europe, Japan, or emerging markets, weakening the appeal of US stocks.

Micro Observation of Major Currency Pairs

USD/JPY: Japan’s end of ultra-low interest rates leads to capital returning to Japan, increasing yen appreciation pressure, risking USD/JPY depreciation.

USD/TWD: Taiwan’s interest rate policy follows the dollar, but structural issues like the housing market limit room for rate cuts. Expect slight TWD appreciation with limited scope.

EUR/USD: Europe’s economy is weaker, but the euro is relatively resilient. If the ECB’s rate cut pace lags behind the Fed, the dollar will face downward pressure.

Practical Investment Strategies

The dollar exchange rate change is not just a headline; it directly impacts your investment returns and asset allocation decisions. This rate-cut cycle is an opportunity for market re-pricing.

Short-term trading: Pay close attention to key data releases like monthly CPI; forex markets often see sharp volatility within 24 hours before and after these releases, allowing for strategic long or short positions.

Medium-term allocation: Consider increasing holdings of gold, Bitcoin, and other assets that benefit from dollar weakness.

Long-term perspective: Remember, the dollar, though weakening, has not lost its safe-haven status. Major geopolitical or financial crises will still attract capital flows back, creating volatility and opportunities.

Core principle: Uncertainty itself is an investment opportunity; the key is to identify and execute in advance.