History will not repeat itself: Why is it difficult for the US dollar to replicate its 2024 surge after the Fed’s rate cut?
2025-09-18 22:02:52
The Federal Reserve announced its interest rate decision early this morning, with the federal funds rate at 4.00-4.25%. The US dollar index fell 50 points from 96.71 to 96.21. After that, as Jerome Powell revealed part of the monetary policy path and basis at the post-meeting press conference in the afternoon local time, the market voted with its feet and interpreted the conclusion that the Federal Reserve's monetary policy was not as expected. The US dollar index quickly rose 80 points, and at one point rose to 97.06 during the session.
The same intraday trend reminds us of the Federal Reserve's unexpected 50 basis point interest rate cut on September 18, 2024.
On September 18, 2024, the Federal Reserve initiated a policy shift with an unexpected 50 basis point interest rate cut. However, the US dollar index strengthened against the trend, climbing from 100.15 to 110.16 at the end of the year, hitting a four-year high. This abnormal phenomenon of "interest rate cut and strengthening" is essentially the result of the resonance of multiple special conditions.
(Dollar Index Time-Sharing Chart, September 18, 2024)
Despite the US unemployment rate rising to 4.4% in 2024, core PCE inflation remained stable at 2.6%, significantly higher than the Eurozone's 2.1% and Japan's 2.1%. More importantly, US GDP growth remained at 2%, far exceeding the Eurozone's 0.9% and Japan's 0.5%. This combination of "growth resilience and inflation stickiness" has led the market to believe that the Fed's rate cuts are "precautionary easing" rather than "crisis response," and that the attractiveness of US dollar assets has not been weakened by the rate cuts.
The European Central Bank began a cycle of interest rate cuts in 2024, reducing them eight times. The Bank of Japan maintained its interest rate below 0.5%, and the Bank of England initiated balance sheet reduction but delayed rate cuts. This pattern of the Federal Reserve proactively easing but with high interest rates, while other central banks passively followed suit, has made the US dollar a relatively strong currency in the global monetary easing race.
That is, strong economic growth, coupled with the interest rate differential brought about by the absolute value of interest rates, has caused the US dollar index to rise since the Federal Reserve announced a rate cut.
On the other hand, on September 18, 2025, the Federal Reserve cut interest rates by 25 basis points to 4.00-4.25%, but the US dollar index fell into volatility after a brief rebound, and it may be difficult to replicate the unilateral rise in 2024.
(Time-sharing chart of the US Dollar Index on September 18, 2025)
In 2025, the U.S. economy will show "stagflation" characteristics: with the U.S. non-farm payroll data in July significantly lower than expected (only 73,000 new jobs, far below the market expectation of 110,000), coupled with the significant downward revisions to the data in May and June (a total decrease of 258,000 jobs), the market has raised concerns about the risk of a U.S. recession. At the same time, the CPI in August was 2.9% year-on-year (core CPI 3.1%), far from the target of 2%.
This combination of rebounding inflation and deteriorating employment forced the Federal Reserve to acknowledge for the first time in its policy statement that the risk-free path had vanished, weakening market confidence in monetary policy. More crucially, the pass-through effect of tariffs has become apparent, with housing (OER up 3.98% year-on-year) and energy prices (up 12% year-on-year) becoming new inflation drivers, weakening expectations of the dollar's purchasing power.
At the same time, the ECB took a hawkish turn: in September 2025, the ECB kept interest rates unchanged and did not release any signal of further interest rate cuts.
The Bank of Japan's normalization process: The Bank of Japan raised interest rates by 25 basis points to 0.5% in January 2025 and announced the "end of negative interest rate policy" in July. The yen exchange rate rebounded, and Japanese bond yields also rose.
This policy divergence of "loose in the US and tight in Europe and Japan" has completely disrupted the monetary easing balance in 2024, and the interest rate advantage of the US dollar has shrunk significantly.
The Trump administration's combination of tax cuts and tariffs has caused the US fiscal deficit to rise to 6.2% of GDP, and the 10-year Treasury yield has widened due to the term premium. More seriously, the government's interference with the Federal Reserve's independence (such as the attempt to fire Governor Cook and install his close confidant, Milan) has sparked market concerns about the creditworthiness of the US dollar, leading to a significant decline in the dollar's share of reserve currencies.
A 25 basis point rate cut in 2025 is fully anticipated by the market, with federal funds futures indicating a 90% probability of this happening by September. More importantly, the dot plot shows the Fed's 2026 rate forecast at 3.0%. This dovish policy guidance has weakened the dollar's long-term appeal.
The strengthening of the US dollar index in 2024 due to the Federal Reserve's interest rate cut is the last glory of the US dollar in the afterglow of "unipolar hegemony"; the interest rate cut in 2025 marks the entry of the global monetary system into a new era of "multipolar game".
Whether the US dollar can achieve a "soft landing" under the pressure of stagflation in the future, whether the Federal Reserve can find a balance between inflation rebound and employment deterioration, global geopolitical risks and the process of de-dollarization by various countries hoarding gold will all affect the rise of the US dollar index.
In this era of uncertainty, the dollar's "special status" is fading, and the trend towards monetary diversification has begun. For investors, the dollar's safe-haven properties will begin to weaken in 2025.
As previously mentioned, the US dollar may begin to rebound along the trend line when the Fed announces interest rates, and with the market retaining its memory, this rebound could be quite aggressive. Currently, it has rebounded to near the lower edge of the upper box, but is being suppressed by the moving average and the lower edge of the box. The question remains whether the US dollar index can break through the upper edge of the box at 97.70. If it can eventually break through the upper edge of the upper box around 98.60, the head-and-shoulders top trend will be resolved, and the US dollar will begin to rise. Otherwise, this may be the dollar's "last dance."
(Daily chart of the US dollar index, source: Yihuitong)
The same intraday trend reminds us of the Federal Reserve's unexpected 50 basis point interest rate cut on September 18, 2024.
Two almost identical intraday charts. Will the US dollar start a sharp rebound like last year?
On September 18, 2024, the Federal Reserve initiated a policy shift with an unexpected 50 basis point interest rate cut. However, the US dollar index strengthened against the trend, climbing from 100.15 to 110.16 at the end of the year, hitting a four-year high. This abnormal phenomenon of "interest rate cut and strengthening" is essentially the result of the resonance of multiple special conditions.
(Dollar Index Time-Sharing Chart, September 18, 2024)
Despite the US unemployment rate rising to 4.4% in 2024, core PCE inflation remained stable at 2.6%, significantly higher than the Eurozone's 2.1% and Japan's 2.1%. More importantly, US GDP growth remained at 2%, far exceeding the Eurozone's 0.9% and Japan's 0.5%. This combination of "growth resilience and inflation stickiness" has led the market to believe that the Fed's rate cuts are "precautionary easing" rather than "crisis response," and that the attractiveness of US dollar assets has not been weakened by the rate cuts.
The European Central Bank began a cycle of interest rate cuts in 2024, reducing them eight times. The Bank of Japan maintained its interest rate below 0.5%, and the Bank of England initiated balance sheet reduction but delayed rate cuts. This pattern of the Federal Reserve proactively easing but with high interest rates, while other central banks passively followed suit, has made the US dollar a relatively strong currency in the global monetary easing race.
That is, strong economic growth, coupled with the interest rate differential brought about by the absolute value of interest rates, has caused the US dollar index to rise since the Federal Reserve announced a rate cut.
On the other hand, on September 18, 2025, the Federal Reserve cut interest rates by 25 basis points to 4.00-4.25%, but the US dollar index fell into volatility after a brief rebound, and it may be difficult to replicate the unilateral rise in 2024.
(Time-sharing chart of the US Dollar Index on September 18, 2025)
Behind this turning point is a profound restructuring of the global economic landscape:
In 2025, the U.S. economy will show "stagflation" characteristics: with the U.S. non-farm payroll data in July significantly lower than expected (only 73,000 new jobs, far below the market expectation of 110,000), coupled with the significant downward revisions to the data in May and June (a total decrease of 258,000 jobs), the market has raised concerns about the risk of a U.S. recession. At the same time, the CPI in August was 2.9% year-on-year (core CPI 3.1%), far from the target of 2%.
This combination of rebounding inflation and deteriorating employment forced the Federal Reserve to acknowledge for the first time in its policy statement that the risk-free path had vanished, weakening market confidence in monetary policy. More crucially, the pass-through effect of tariffs has become apparent, with housing (OER up 3.98% year-on-year) and energy prices (up 12% year-on-year) becoming new inflation drivers, weakening expectations of the dollar's purchasing power.
At the same time, the ECB took a hawkish turn: in September 2025, the ECB kept interest rates unchanged and did not release any signal of further interest rate cuts.
The Bank of Japan's normalization process: The Bank of Japan raised interest rates by 25 basis points to 0.5% in January 2025 and announced the "end of negative interest rate policy" in July. The yen exchange rate rebounded, and Japanese bond yields also rose.
This policy divergence of "loose in the US and tight in Europe and Japan" has completely disrupted the monetary easing balance in 2024, and the interest rate advantage of the US dollar has shrunk significantly.
The Trump administration's combination of tax cuts and tariffs has caused the US fiscal deficit to rise to 6.2% of GDP, and the 10-year Treasury yield has widened due to the term premium. More seriously, the government's interference with the Federal Reserve's independence (such as the attempt to fire Governor Cook and install his close confidant, Milan) has sparked market concerns about the creditworthiness of the US dollar, leading to a significant decline in the dollar's share of reserve currencies.
A 25 basis point rate cut in 2025 is fully anticipated by the market, with federal funds futures indicating a 90% probability of this happening by September. More importantly, the dot plot shows the Fed's 2026 rate forecast at 3.0%. This dovish policy guidance has weakened the dollar's long-term appeal.
Conclusion: The US dollar index will not go through a wave of market like in 24 years, but may just be a rebound.
The strengthening of the US dollar index in 2024 due to the Federal Reserve's interest rate cut is the last glory of the US dollar in the afterglow of "unipolar hegemony"; the interest rate cut in 2025 marks the entry of the global monetary system into a new era of "multipolar game".
Whether the US dollar can achieve a "soft landing" under the pressure of stagflation in the future, whether the Federal Reserve can find a balance between inflation rebound and employment deterioration, global geopolitical risks and the process of de-dollarization by various countries hoarding gold will all affect the rise of the US dollar index.
In this era of uncertainty, the dollar's "special status" is fading, and the trend towards monetary diversification has begun. For investors, the dollar's safe-haven properties will begin to weaken in 2025.
As previously mentioned, the US dollar may begin to rebound along the trend line when the Fed announces interest rates, and with the market retaining its memory, this rebound could be quite aggressive. Currently, it has rebounded to near the lower edge of the upper box, but is being suppressed by the moving average and the lower edge of the box. The question remains whether the US dollar index can break through the upper edge of the box at 97.70. If it can eventually break through the upper edge of the upper box around 98.60, the head-and-shoulders top trend will be resolved, and the US dollar will begin to rise. Otherwise, this may be the dollar's "last dance."
(Daily chart of the US dollar index, source: Yihuitong)
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
