How to position the US dollar under the 2025 interest rate cut cycle? Investment opportunities from the exchange rate chart

2024年 Federal Reserve begins rate cut cycle, and this policy shift is reshaping global capital flows. According to the latest forecasts, the Fed plans to lower interest rates to around 3% by 2026. What does this mean for the dollar trend and investment layout? This article dissects it for you through the USD exchange rate chart, historical data, and current factors.

The Logic Behind the USD Exchange Rate Chart

The USD exchange rate refers to the conversion ratio between the US dollar and other currencies. For example, EUR/USD=1.04 means 1.04 USD can exchange for 1 Euro; if it rises to 1.09, the Euro appreciates and the USD depreciates; if it drops to 0.88, the Euro depreciates and the USD appreciates.

To understand the USD exchange rate chart, the key is to look at the US Dollar Index — it is composed of the US dollar against major currencies like the Euro, Yen, Pound, etc. But here’s an easily overlooked point: US rate cuts do not necessarily directly cause the USD index to fall; it’s also necessary to observe the policy directions of other central banks. Because exchange rates are relative, not absolute values.

Four Major Factors Determining the Strength of the USD

Interest rate policy is the core variable

Interest rates directly influence the attractiveness of the USD. In a high-interest environment, capital flows into the USD seeking higher returns; in a low-interest environment, funds shift to other high-yield markets. But a common mistake investors make is only watching the current rate hikes or cuts, ignoring market expectations. The USD market is extremely efficient and reacts before official announcements, often pricing in expectations in advance. By observing the USD exchange rate chart, you’ll find that the USD usually leads rate decision movements.

The Invisible Impact of USD Supply

Quantitative easing (QE) and quantitative tightening (QT) change the amount of USD in the market. QE increases USD supply, leading to depreciation; QT reduces USD, pushing it higher. But these effects are not immediate; investors need to closely monitor the Fed’s moves.

International Trade Patterns Drive Long-term Trends

The US’s long-term trade deficit (imports greater than exports) affects USD supply and demand. Increased imports require more USD, pushing the USD up; increased exports reduce USD demand. These impacts are more long-term and are hard to detect in the short term.

Global Confidence Determines USD Status

The USD’s role as the world’s primary settlement currency stems from global trust in the US. But in recent years, the wave of “de-dollarization” has accelerated — the Eurozone, Renminbi crude oil futures, cryptocurrencies, etc., are challenging USD hegemony. Since 2022, many countries have lost confidence in the USD and turned to gold. If the US cannot effectively restore confidence through policy, USD liquidity may decline, which is also why the US has become more cautious in rate decisions.

Key Turning Points in the 50-Year USD Exchange Rate Chart

Over the past half-century, the USD has experienced eight major phases driven mainly by significant economic events:

• 2008 Financial Crisis: Market panic, massive capital flight into USD, USD sharply appreciated
• 2020 Pandemic Period: US money printing to rescue the economy temporarily weakened the USD, then rebounded strongly as the economy stabilized
• 2022-2023 Aggressive Rate Hike Cycle: The Fed’s aggressive moves pushed the USD to a peak against most currencies, with the USD index breaking through 114
• 2024-2025 Rate Cut Initiation: Reduced rate attractiveness, capital flows into cryptocurrencies and gold, pressuring the USD

Currently, the USD exchange rate chart is entering a new pattern — no longer a one-way rapid decline, but oscillating under multiple forces.

How Will the USD Evolve? Forecast for the Next Year

In the current environment, more factors are bearish for the USD than bullish:

Bearish factors: US trade policies are becoming more aggressive, increasing costs for global companies doing business with the US, which damages USD demand; de-dollarization continues to advance, with gold attracting capital; multiple central banks are cutting rates at a pace comparable to or faster than the US.

Bullish factors: Geopolitical risks could trigger financial crises at any time, and in such cases, the USD remains the ultimate safe-haven asset.

Core judgment: The most likely future trend of the USD index is “oscillation at high levels followed by a slow weakening,” rather than a one-way sharp depreciation. Because the pace and extent of rate cuts by different central banks will directly influence relative strength. If the European Central Bank cuts rates more slowly than the Fed, the Euro will appreciate against the USD, causing the USD to weaken — but the magnitude will be limited.

Chain Reactions of USD Trends on Various Assets

Gold: When the USD weakens, gold benefits most directly. Since gold is priced in USD, a depreciating dollar lowers the purchase cost and boosts demand. In a rate-cut environment, gold’s appeal is even stronger, as the opportunity cost of zero-yield assets drops significantly.

Stock Market: Rate cuts stimulate capital inflows into stocks, especially tech and growth stocks. But if the USD becomes too weak, foreign investors might shift to Europe, Japan, or emerging markets, reducing the inflow into US equities.

Cryptocurrencies: A weakening USD generally reduces purchasing power, often positively impacting the crypto market. When funds seek assets to hedge inflation, Bitcoin, known as “digital gold,” is often viewed as a store of value during global economic turbulence.

Major Currency Pair Trends:

USD/JPY: Japan is ending ultra-low interest rates, capital flows back into Yen, so Yen is expected to appreciate and USD/JPY to decline.

TWD/USD: Taiwan’s interest rates follow the USD but have autonomy (considering housing policies). Taiwan relies on exports, so a lower exchange rate benefits exports. During a rate-cut cycle, TWD will appreciate but with limited scope.

EUR/USD: The Euro is relatively stronger than the USD, but Europe’s economy is weak and inflation remains high. If the ECB gradually cuts rates, the USD will weaken slightly but not sharply depreciate.

How to Capture Trading Opportunities from USD Fluctuations

The USD’s strength or weakness directly impacts investment returns and asset allocation decisions. This rate cut cycle is opening a new market rhythm — capital flows are changing, and trading opportunities are shifting accordingly.

Short-term trading: Before and after monthly CPI releases, the USD index often fluctuates sharply. Investors can seize these short-term swings for long or short positions. The key is to grasp the timing of each major data release and perform quick analysis.

Core investment principle: Uncertainty itself is a source of opportunity. Instead of passively waiting for exchange rate movements, it’s better to proactively position based on USD exchange rate charts and follow the trend. Small fluctuations caused by short-term events could be your entry points. Remember, although the USD is entering a rate-cut cycle, the process will be slow and tortuous, full of trading opportunities.