USD Investment Guide in the Downward Interest Rate Cycle | 2025 US Dollar Interest Rate Trends and Asset Rotation Opportunities

Under the Wave of De-dollarization, Will the US Dollar Really Depreciate Significantly?

Since the Federal Reserve began a rate-cutting cycle in September 2024, discussions about the dollar’s outlook have intensified. In simple terms, lowering interest rates means reduced returns on dollar holdings, prompting capital to seek higher-yield assets—this presents both risks and opportunities.

The dollar is not just an American issue; it is the lifeblood of global trade. Every adjustment in US interest rates influences the pulse of global financial markets. According to the Fed’s dot plot forecast, the goal is to bring US interest rates down to around 3% by 2026. But the question remains: Will the dollar rise or fall? How should investors respond?

Understanding the US Dollar from Exchange Rate Basics

The USD exchange rate essentially reflects the conversion ratio between the dollar and other currencies. For example, EUR/USD=1.04 indicates that 1 US dollar can be exchanged for 1.04 euros. When this value rises, it signifies dollar appreciation; when it falls, dollar depreciation.

However, what truly impacts global markets is the US Dollar Index—which measures the dollar’s overall strength relative to six major currencies, including the euro, Japanese yen, and British pound. It’s important to note that US monetary policy decisions, like rate cuts, do not directly determine the dollar index’s direction; they are also influenced by policies of other central banks. Sometimes, even if the US cuts rates, the dollar can appreciate if Europe cuts rates more aggressively.

The Driving Forces Behind US Dollar Rate Trends

Interest Rate Policy as the Primary Driver

High interest rates attract capital into the dollar market, while low rates push capital toward other high-yield assets. But investors must understand: the market is forward-looking. The dollar does not wait for rate cuts to be confirmed before depreciating; it reacts in anticipation. That’s why monitoring changes in the Fed’s dot plot is more important than focusing solely on specific decisions.

The Supply and Demand of US Dollars

Quantitative easing(QE) increases the dollar supply in the market, lowering its value; quantitative tightening(QT) has the opposite effect. But these shifts do not produce instant results; investors need to continuously track the Fed’s policy stance.

Long-term Impact of Trade Structures

A persistent US trade deficit(import exceeds export) puts pressure on dollar supply. When the US increases imports, more dollars are needed for payments, boosting demand for the dollar; the opposite is also true. However, such effects are usually long-term and do not manifest immediately in the short run.

US Creditworthiness and Global Status

This is the most easily overlooked factor. The dollar’s status as the global settlement currency fundamentally stems from worldwide trust in the US. However, the trend of de-dollarization has accelerated in recent years—expanding eurozone influence, the launch of RMB crude oil futures, and the rise of virtual assets like Bitcoin are eroding the dollar’s absolute dominance.

Since the US moved away from the gold standard, many countries have lost confidence in the dollar and US debt, turning instead to gold and other safe-haven assets. If the US cannot effectively restore international confidence, the dollar’s liquidity may face decline risks. This is also a key reason why the Fed has become more cautious in its rate decisions.

Key Milestones in the Half-Century US Dollar Trends

Over the past 50 years, several major economic events have profoundly impacted the dollar index:

• 2008 Financial Crisis: Market panic caused a massive flight into the dollar, leading to sharp appreciation.
• 2020 Pandemic Shock: US massive stimulus measures temporarily weakened the dollar, but economic rebound led to a strong recovery.
• 2022-2023 Aggressive Rate Hikes: The Fed’s consecutive large rate increases made the dollar exceptionally strong against most currencies, with the index once surpassing 114.
• 2024-2025 Rate Cut Initiation: The Fed begins lowering rates, reducing the dollar’s appeal, and capital flows shift toward cryptocurrencies, gold, and other assets.

Future Outlook on US Dollar Rates

Based on current conditions, the dollar faces multiple bearish factors:

Trade Policy Uncertainty: US trade policies are becoming more aggressive, expanding from the China-US trade war to global tariff disputes, potentially weakening demand for the dollar as a trade medium.

Accelerating De-dollarization: Countries continue to reduce dollar reserves and increase holdings of gold and other currencies, and this trend persists.

Narrowing Relative Interest Rate Advantage: Although the US is starting to cut rates, other currencies in the dollar index basket are also lowering rates. The pace and extent of these cuts directly influence relative strength.

Based on the above analysis, the dollar index is likely to experience “high-level oscillation followed by weakening” rather than a one-way sharp depreciation in the next year.

However, it’s important to emphasize that the dollar remains fundamentally a safe-haven currency. In the event of geopolitical shocks or financial crises, capital will flow back into the dollar. This inherent uncertainty itself creates investment opportunities.

How Dollar Fluctuations Affect Other Assets

Gold: Positively Correlated

When the dollar weakens, gold usually benefits. Since gold is priced in dollars, a depreciating dollar lowers gold’s cost in other currencies, boosting demand. Additionally, rate cuts reduce the opportunity cost of holding gold(gold has no interest income), further enhancing its attractiveness.

Stock Markets: Complex Relationship

Rate cuts do stimulate capital inflows into equities, especially tech and growth stocks. But if the dollar depreciates excessively, foreign investors might shift their funds to Europe, Japan, or emerging markets, weakening US stock appeal.

Cryptocurrencies: Indirect Beneficiaries

A weaker dollar often drives up cryptocurrencies, as investors seek assets to hedge inflation. Bitcoin, as “digital gold,” is particularly favored during global economic turbulence and dollar depreciation.

Trends of Major Currencies Against the Dollar

USD/JPY: Japan’s end of ultra-low interest rates may lead to yen appreciation, putting downward pressure on USD/JPY.

TWD/USD: Taiwan’s interest rates tend to follow US rates, but as an export-driven economy, a weaker TWD benefits exports. Limited appreciation expected.

EUR/USD: The euro remains relatively strong, but Europe faces economic challenges. If the ECB gradually cuts rates, the dollar may weaken mildly, but not sharply.

Seizing Investment Opportunities in the Market Shift

The rate-cut cycle is not just an economic phenomenon; it directly impacts investment returns, asset allocation, and retirement planning. This shift in US interest rates signifies a reallocation of capital—where are the new opportunities, and where are the risks?

In the short term, key events like monthly CPI releases and Fed meetings will trigger fluctuations in the dollar index. Precise traders can capitalize on these short-term movements. But in the long run, understanding the de-dollarization trend and changes in US economic fundamentals is the key to success.

Remember a fundamental investment truth: whenever uncertainty exists, trading opportunities arise. The key is to position early, follow the trend, and avoid passive waiting.