The US dollar has remained persistently strong and is currently near the top of historical ranges. However, the strength of the dollar and potential Federal Reserve rate cuts alone may not be sufficient to signal a top in the dollar’s cycle. We see a case that suggests that initial Fed rate cuts may not halt the USD cycle, as historical patterns indicate that the cycle typically turns well after the Fed begins easing and US interest rates fall below the median of G10 countries. Historically, the US interest rate cycle has been a significant driver of major USD cycle tops.

USD Index DXY Daily Chart – Facing the 200 SMA

However, the timing of these cycles has been unpredictable, with lags often longer than expected. For example, in 1985, Fed funds began to decline about six months before a large USD shift, aided significantly by actions taken during the G7 Plaza Accord. Similarly, the peak of the USD in 2002 occurred more than a year and a half after US rates peaked. These instances illustrate that “Big USD” cycles exhibit significant inertia, with momentum changing gradually rather than abruptly.

Deutsche Bank underscores that based on the current policy trajectory, the United States is anticipated to maintain a position near the top of the G10 leaderboard for short-term rates by the conclusion of 2025. This holds significance because previously, major bearish reversals for the USD started when US short-term rates transitioned from being among the top half of G10 peers to the bottom half. Essentially, this suggests that US interest rates exhibit substantial inertia, and the trajectory of the USD is likely to continue its decline only if US rates significantly lag behind those of the majority of G10 countries.