The 2025-2026 USD decline cycle is approaching | Exchange rate trends and investment strategies amid the interest rate cut wave

The interest rate cut cycle has already begun. What does this mean? Simply put, money becomes cheaper, capital flows toward risk assets, and the US dollar faces downward pressure. According to the latest dot plot, the Federal Reserve aims to cut interest rates to around 3% by 2026. But will the US dollar really decline throughout this rate-cutting wave? The answer is not that simple.

Why Might the US Dollar Fall? Analysis of Four Core Factors

There are dozens of factors influencing the USD exchange rate, but four are most critical.

First, interest rate policy is the direct driver. When the Fed cuts rates, the attractiveness of the dollar diminishes, and funds flow into higher-yield markets. However, investors often make the mistake of only looking at current rate hikes or cuts, ignoring the fact that markets have already priced in expectations in advance. The USD market is highly efficient and tends to react months before rate cuts are confirmed.

Second, changes in the USD supply. Quantitative easing (QE) increases USD supply, lowering its value; quantitative tightening (QT) reduces supply, supporting USD appreciation. But these effects are not immediate; closely monitoring Fed actions is necessary to grasp the rhythm.

Third, the long-term effects of trade deficits. The US has maintained a long-term trade deficit with imports exceeding exports, which affects USD supply and demand. Increased imports require more USD, temporarily boosting the dollar; increased exports reduce USD demand, potentially leading to USD depreciation. These impacts are usually long-term and not immediately apparent.

Fourth, global trust is wavering. The USD’s status as the world’s primary settlement currency stems from global trust in the US. But recent “de-dollarization” trends are becoming more evident, with the euro, renminbi, and cryptocurrencies challenging USD dominance. Since 2022, many countries have started buying gold instead of holding US Treasuries, posing a substantial threat to the USD’s long-term trend.

External Drivers of USD Decline: Trade Wars and Accelerating De-dollarization

Beyond monetary policy, two other forces are pushing the USD downward.

The US’s trade policies are becoming more aggressive, escalating from past tariffs on China to global trade conflicts. As costs for companies doing business with the US rise, international demand for USD naturally declines, creating a bearish effect on the dollar.

Meanwhile, the pace of de-dollarization worldwide is accelerating. The continuous rise in gold prices reflects this trend. If the US cannot effectively restore confidence in the dollar, USD liquidity may further decrease, exerting long-term downward pressure.

History Repeats? Key Moments in the USD Exchange Rate Over the Past 50 Years

Looking at the past half-century, the USD has experienced eight major phases, each associated with significant economic events.

2008 Financial Crisis: Panic triggered a massive flight to the dollar, causing the USD index to soar.

2020 Pandemic Shock: The US government flooded the market with money, temporarily weakening the dollar, but it rebounded strongly as the US economy led the recovery.

2022-2023 Aggressive Rate Hikes: The Fed raised rates sharply, strengthening the dollar against most currencies, with the USD index even surpassing 114, a record high.

2024-2025 Shift to Rate Cuts: As inflation eases, the Fed begins rate cuts at the end of 2024, prompting market funds to flow into cryptocurrencies, gold, and other alternative assets, putting pressure on the dollar.

How Deep Will the USD Fall? Market Trend Predictions

Based on current circumstances, the factors bearish for the USD outweigh the bullish ones. Therefore, the US dollar index is highly likely to oscillate at high levels before weakening, rather than plummeting in a single move.

However, one often overlooked point is: Geopolitical risks remain variables. If new conflicts or financial crises erupt, funds will quickly flow back into the dollar, as it remains the world’s primary safe-haven currency.

Another key aspect is relative performance. While the USD is expected to cut rates, among the major currencies in the USD index, except for the yen, others are also beginning to cut rates. Who cuts faster or more aggressively will directly determine exchange rate strength. For example, if the European Central Bank delays rate cuts while the US continues to lower rates, the euro will appreciate and the dollar weaken; the opposite scenario also applies.

How Different Assets Respond to the USD Downturn Cycle

Gold benefits the most. When the dollar falls, gold priced in USD becomes cheaper, lowering purchase costs and increasing demand. Rate cuts also enhance gold’s appeal, as lower interest rates reduce opportunity costs for holding gold.

Stock markets face a double-edged sword. Rate cuts often encourage capital inflows into equities, especially tech and growth stocks. But if the dollar depreciates excessively, foreign investors might shift to Europe, Japan, or emerging markets, weakening US stock attractiveness.

Cryptocurrencies present opportunities. A declining dollar means reduced purchasing power of USD, prompting capital to seek hedges in crypto assets. Bitcoin, as “digital gold,” is especially valued during global economic turbulence and USD depreciation.

Specific Outlooks on Major Currency Pairs

USD/JPY: The Bank of Japan has ended its ultra-low interest rate policy, prompting capital to flow back into Japan, increasing yen appreciation pressure. Expect USD/JPY to trend downward.

TWD/USD: Taiwan’s interest rates follow US policy, but domestic considerations (like housing market regulation) limit rapid rate cuts. As an export-oriented economy, a stronger TWD benefits exports. Expect modest TWD appreciation.

EUR/USD: The euro remains relatively strong, but Europe’s economy is weaker, with persistent inflation and sluggish growth. If the ECB gradually cuts rates, the USD will weaken, but not drastically.

Seizing Investment Opportunities During the USD Downturn

The strength or weakness of the dollar directly impacts global investment returns, asset allocation, and retirement planning. The rate-cut cycle indicates a shift in market rhythm, with capital flows changing accordingly.

Instead of passively waiting, proactive positioning is key. In the short term, CPI announcements each month cause significant fluctuations in the USD index, which can be exploited through long or short strategies. Long-term, tracking central bank policies and pre-judging exchange rate trends is essential.

Remember: Whenever uncertainty exists, investment opportunities arise. During a USD decline cycle, the key is to grasp information release timings, conduct precise analysis, and avoid blindly following market sentiment.