Why is the US dollar falling? The 2025 US dollar depreciation trend and new investment ideas

Why Is the US Dollar Continually Falling? This question has been asked frequently in the investment community recently. The simple answer is: the interest rate cut cycle that began in September 2024 has changed the entire capital flow. When the dollar becomes “cheaper,” funds naturally flow into risk assets and high-yield opportunities, leading to a decline in the dollar’s attractiveness.

But the reality is far more complex. The rise and fall of the dollar are not solely determined by a single rate cut, but are influenced by a multitude of factors including the global economy, geopolitical tensions, and central bank policies across various countries.

The Four Main Drivers Behind the Continuous Decline of the US Dollar

Changes in interest rate policies are the direct trigger

The Federal Reserve’s interest rate decisions have the most direct impact on the dollar’s movement. When interest rates are high, capital seeking returns floods into the dollar; when rates start to decline, the opposite occurs. However, there’s a detail investors often overlook: the market doesn’t wait for rate cuts to actually happen. The dollar begins to weaken the moment rate cut expectations emerge.

According to the latest Fed dot plot forecasts, the future US interest rate target is expected to fall to around 3% before 2026. This signal has long been digested by the market, causing capital to shift early into higher-yield assets.

US dollar supply is expanding

Quantitative easing (QE) and quantitative tightening (QT) are not static. When the Fed increases the supply of dollars, the amount of dollars in circulation increases, and the value of each dollar decreases. This logic is simple but often overlooked—an increase in supply leads to depreciation.

The “De-dollarization” wave accelerates

This is a long-term but profoundly impactful factor. Since the US abandoned the gold standard, global confidence in the dollar has been gradually weakening. The rise of the Eurozone, the Chinese renminbi, crude oil futures, and cryptocurrencies all challenge the dollar’s status as the world’s primary settlement currency.

Especially since 2022, more countries have begun reducing their dollar reserves, turning instead to gold and other safe-haven assets. If the US cannot effectively restore international confidence in the dollar, the dollar’s liquidity and demand will face long-term pressure.

Trade deficits and policy uncertainties

The long-standing phenomenon of the US importing more than it exports essentially increases dollar supply. Meanwhile, changing trade policies and tariff wars are also weakening the dollar’s appeal—if doing business with the US becomes more complicated and expensive, global demand for the dollar naturally diminishes.

Reflecting on the Past 50 Years of Major Turning Points for the US Dollar

To understand why the dollar is falling now, we need to look at how it appreciated in the past:

2008 Financial Crisis — The market plunged into panic, and global capital flooded into the dollar seeking safety. The dollar surged significantly.

2020 Pandemic Period — The Fed flooded the market with liquidity to rescue the economy, putting short-term pressure on the dollar. But as the US economy led the recovery, the dollar rebounded strongly.

2022 to 2023 Aggressive Rate Hike Cycle — This was the peak for the dollar. The Fed’s aggressive rate hikes attracted global capital, with the dollar index soaring past 114, showing overwhelming strength against most currencies.

Now (2024-2025), the situation has reversed. The rate cut cycle has begun, capital is flowing into risk assets, and the dollar index is retreating. This is not accidental but a natural result of policy shifts.

How Long Will the US Dollar Keep Falling? What’s the Outlook?

This is a question many investors care about most. Based on current conditions, my judgment is: The US dollar index is more likely to “oscillate at high levels and gradually weaken” over the next year rather than plummet in a single direction.

Why not a sharp decline? There are several key reasons:

First, the dollar remains fundamentally a safe-haven currency. As long as geopolitical risks, financial crises, or economic turbulence occur globally, capital will still seek refuge in the dollar. Recent conflicts like Russia-Ukraine and tensions in the Middle East have validated this.

Second, other countries are also cutting interest rates. The dollar index includes major currencies like the euro, yen, and pound. Their central banks are also under pressure to lower rates. The focus is not whether the US cuts rates, but who cuts faster and more. If the US’s rate cuts are slower than Europe or Japan, the dollar could appreciate.

Third, the US maintains advantages in global politics, economy, and military power. As long as the US continues to innovate and sustain economic resilience, its international dominance of the dollar will be hard to shake.

The Chain Reaction of US Dollar Depreciation on Various Assets

Gold as the Biggest Winner

When the dollar weakens, gold usually strengthens. Since gold is priced in dollars, a weaker dollar means lower gold prices for buyers using other currencies. Additionally, rate cuts reduce the opportunity cost of holding gold (as interest rates on other assets decline), making gold even more attractive.

Stock Markets Will See Capital Reflows

In a rate-cut environment, funds tend to flow from bonds into stocks, especially growth and tech stocks. However, if the dollar becomes too weak, foreign investors might shift their capital to Europe, Japan, or emerging markets seeking higher returns.

Cryptocurrencies Will Benefit

A weaker dollar = reduced purchasing power = investors seek assets to hedge inflation. Cryptocurrencies like Bitcoin, often dubbed “digital gold,” are viewed as stores of value during periods of dollar weakness.

Evolution of Major Currency Pairs

• USD/JPY: With Japan ending ultra-low interest rates, yen capital flows are pushing the currency higher. Expect USD/JPY to decline.
• USD/TWD: Taiwan’s interest rates follow the dollar, but domestic housing market issues also matter. The TWD is expected to appreciate modestly, but not significantly.
• USD/EUR: The euro remains relatively strong, but Europe faces economic challenges. Expect slow rate cuts in Europe, with the dollar weakening slightly but not sharply.

How Should Investors Respond?

Rather than passively waiting for the dollar to rise or fall, it’s better to proactively plan. In the short term, monthly CPI reports can trigger significant volatility in the dollar index—these are trading opportunities. In the long term, understanding the trend direction is more important than chasing short-term fluctuations.

Remember one principle: whenever there is uncertainty, there are investment opportunities. Why is the dollar continually falling? Fundamentally, it’s because the global financial system is re-pricing itself, and old asset allocations need adjustment. Seizing this adjustment can turn risks into gains.