Will the US dollar depreciate during the era of interest rate cuts? A comprehensive analysis of the 2025 exchange rate trend and investment strategies

By the end of 2024, the Federal Reserve will initiate a rate-cutting cycle, and this show is just beginning. Many investors’ instinctive reaction is “rate cuts = dollar depreciation,” but the truth is far more complex.

Rate Cuts Do Not Equal Immediate Dollar Weakening

First, let’s dispel a misconception: dollar depreciation is not an inevitable result of rate cuts.

The logic behind rate cuts is straightforward—lower interest rates reduce the attractiveness of the dollar, capital flows into higher-yield assets, and dollar demand decreases. However, the market won’t be naive enough to wait for the Fed to officially announce rate cuts before reacting. In reality, the entire forex market is highly efficient, and investors have already positioned themselves based on “expectations.”

According to the Fed’s dot plot, the goal is to bring the dollar interest rate down to around 3% before 2026. But the key issue is: Other countries are also cutting rates. The real determinant of dollar depreciation is not how fast the US cuts rates alone, but who cuts faster and whose exchange rate policies are more aggressive.

For example—if the European Central Bank holds steady while the US aggressively cuts rates, the euro will naturally appreciate against the dollar, leading to dollar depreciation. Conversely, the opposite is also true.

The Logic Behind the US Dollar Index

The US Dollar Index (DXY) is a key indicator measuring the overall movement of the dollar, tracking its performance against six major currencies (euro, yen, pound, etc.).

History over the past 50 years shows that fluctuations in the dollar index often accompany major economic events:

• 2008 Financial Crisis: Global panic, capital flows back into the safe haven of the dollar, causing a sharp rise
• 2020 Pandemic: Massive easing by the US, dollar temporarily weakens; but after economic recovery, it rebounds strongly
• 2022-2023 Aggressive Rate Hikes: The Fed raises rates repeatedly, causing the dollar to strengthen significantly against most currencies, with the index surpassing 114 at one point
• 2024-2025 Rate Cut Cycle: Capital begins seeking alternative investments, reducing the dollar’s appeal

But there is a crucial turning point—the trend of dollar depreciation is forming, but it won’t be a one-way slide.

Why Won’t the Dollar Keep Falling?

Four deep factors determine the medium- to long-term trend of the dollar:

1. Interest Rate Policy Is Only Surface-Level

Although US rates are falling, if other central banks cut rates even faster, the dollar can still remain relatively strong. Currently, economies like Japan and Europe are also not in great shape, limiting their room for aggressive rate cuts. Therefore, interest rate differentials will support the dollar over the long term.

2. Changes in US Money Supply (QE vs QT)

The Fed’s quantitative easing (QE) directly affects how much USD is in circulation. QE increases dollar supply (bearish for USD), QT reduces dollar supply (bullish for USD). Currently, the Fed’s cautious stance will partly offset the dollar depreciation pressure from rate cuts.

3. Geopolitical Risks Are Ever-Present

Whenever a major crisis occurs globally—geopolitical tensions, financial storm warnings, emerging market turbulence—capital immediately flows back into the safest assets: the dollar. That’s why the dollar is called a “safe-haven currency.”

4. US Economic Resilience Remains

Despite de-dollarization trends and credit challenges, the US’s advantages in global politics, economy, and military power remain unmatched. As long as the US maintains this edge, the dollar won’t undergo a drastic devaluation.

Is De-dollarization a Real Threat to the Dollar?

This is a long-term concern. Since the US abandoned the gold standard, doubts about dollar hegemony have grown. The Eurozone, RMB, crude oil futures, cryptocurrencies, and countries increasing gold holdings—these are gradually eating into the dollar’s market share.

But the reality is: no currency or asset currently can fully replace the dollar’s role in settlement. So, de-dollarization is more of a long-term trend and won’t cause a fatal blow to the dollar in one or two years.

How Do Different Assets Perform in a Dollar Depreciation Environment?

Gold—The Biggest Winner

When the dollar weakens, gold benefits the most because gold is priced in dollars; a weaker dollar makes gold cheaper to buy. Plus, in a rate-cut environment, the absence of interest costs for gold removes a disadvantage, greatly increasing its appeal. Therefore, gold is likely to continue rising.

Stock Markets—Opportunities and Risks

US rate cuts usually stimulate capital inflows into stocks, especially tech and growth stocks. But if the dollar depreciates too quickly, foreign investors might shift to Europe, Japan, or emerging markets, which could weaken the attractiveness of US equities.

Cryptocurrencies—Benefiting from Currency Depreciation

Bitcoin, as “digital gold,” often performs well during dollar depreciation and rising inflation expectations. Capital fleeing traditional financial systems in search of assets to hedge currency devaluation is bullish for the entire crypto market.

Practical Observation of Major Currency Pairs

USD/JPY

Japan just ended its ultra-low interest rate era, and capital is starting to flow back into Japan, making yen appreciation likely. Expect USD/JPY to face downward pressure.

TWD/USD

Taiwan’s interest rates follow the US, but as an export-driven economy, a low exchange rate benefits trade. During the US rate-cut cycle, the Taiwan dollar may appreciate, but the extent will be limited.

EUR/USD

Europe’s economy remains weak, inflation is still high but growth stagnates, and the ECB’s rate cuts may slow down. While the dollar will weaken, it won’t do so dramatically, and the euro’s gains will be limited.

The Most Likely Scenario for the US Dollar in 2025

Based on all factors, the most probable trend for the dollar index in the next year is “oscillation at high levels followed by gradual weakening,” rather than a one-way plunge.

Reasons:

• Mostly bearish factors: rising trade tensions, ongoing de-dollarization, gold attracting capital
• Bullish factors: geopolitical risks, safe-haven demand, economic resilience
• Key variable: the relative speed of central bank policies—who cuts faster and who tightens or loosens more determines who appreciates

In the short term (3-6 months): Monthly CPI releases and FOMC decisions will create forex volatility, offering trading opportunities.

In the medium term (6-12 months): The dollar’s depreciation trend will gradually establish but won’t be abrupt.

In the long term (over 1 year): The dollar’s relative weakening is a certainty, but there’s no need to worry about the dollar losing its reserve currency status.

What Should Investors Do?

Don’t be fooled by the simple logic of “rate cuts = dollar depreciation.” True investment opportunities come from understanding the “complexity.”

Go long on gold: The safest choice in a dollar depreciation environment.

Focus on high-yield currencies: If a country’s central bank cuts rates much less than the US, its currency will appreciate.

Capitalize on volatility trading: Short-term fluctuations around major economic data releases are prime opportunities for skilled traders.

Moderate allocation to crypto assets: In an environment of abundant liquidity and strong dollar depreciation expectations, cryptocurrencies’ risk-reward ratio improves.

Final advice: As long as uncertainty exists in the market, there are investment opportunities. The big dollar depreciation cycle has just begun, and early investors often reap the greatest rewards.