Will the dollar keep its dominance during 2025? See which FX signals currency traders should watch while interest rate cycles shift internationally.
For decades, the U.S. dollar has successfully held its position as the world’s most dominant currency, supported by economic scale, the trust in American institutions, and high liquidity. However, this dominance is no longer being taken for granted as 2025 progresses. Changes are gaining traction in global trade, like realigning policies of central banks, increased use of alternative currencies, and shifting global macro conditions. As the Federal Reserve indicates a potential shift and during ever-evolving interest rate conditions, traders are left to wonder: Will the dollar remain the most dominant, or are we witnessing early signs of a changing currency hierarchy?
The Dollar’s Reign: Strength or Complacency?
For long, the U.S. dollar was considered the foundation of global finance. While it does continue to dominate capital flows and global trade, its strength has been driven more by monetary tightening in recent years. In 2022, the U.S. Dollar Index (DXY) rose to a 20-year record due to Federal Reserve rate increases in response to persistent inflation.
This has leveled out in the meantime, with it being 99.33 in early 2025, which indicates a shift in investor sentiment and a global dynamic that’s evolving.
In uncertain times, the dollar has often been viewed as one of the more reliable assets. By the end of 2024, it still made up 57.8% of global foreign exchange reserves, which shows it’s still very much the world’s main reserve currency. That being said, this number has been indicating a slow decline compared to previous years, pointing to a noticeable shift as more central banks spread their holdings across other currencies.
Although we can definitely regard the dollar’s supremacy as consistent, it’s certainly not permanent. Changing aspects like monetary policies evolving, geopolitical tensions, and the appearance of alternative currencies tells us that the U.S. dollar might be challenged in the future.
The Impact of Fed Policy on FX
As of May 2025, the federal funds rate has been firmly held between 4.25% and 4.50% by the Federal Reserve, while holding a careful approach during times of inflation risks and mixed economic signs. The Fed has held its position by emphasizing inflation control and data dependence, while market participants have been debating the potential for rate cuts later in the year.
Meanwhile, other major central banks have started to adjust their policies. As a response to managing inflation pressures and slowing growth, several banks are cutting their base rates. Both the Bank of England and the European Central Bank have lowered their Bank Rate and deposit rate to 4.25% and 2.25% respectively. On the other hand, the Bank of Japan has monitored domestic inflation trends while holding its own policy close to 0.5%.
This clear shift in dynamics is affecting the appeal of the dollar in carry trades and jeopardizing its secure reputation. The ability to monitor monetary tightening and how it can affect important FX pairs is essential to traders. Tools designed for MT 4 trading can offer real-time insights and customizable technical overlays. This helps traders spot rate-powered momentum shifts and emerging trends.
Potential Dollar Rivals
Euro
While the dollar still leads global reserves, it’s not the only player getting attention. The euro has been making a quieter comeback, helped along by rate hikes from the European Central Bank. Its share isn’t growing much, but the fact that it’s held steady says something in a region that’s had its fair share of uncertainty.
China
China’s renminbi is also being pushed harder on the global stage, especially in trade deals with BRICS partners and Belt and Road countries. But capital controls and the lack of full convertibility still make it hard for other central banks to fully trust it as a reserve option.
Gold and Digital Assets
Gold has also been gaining traction again, with more central banks holding it as a hedge, particularly those cautious about U.S. policy moves. There’s also growing interest in digital assets, but they’re still too volatile to be taken seriously as reserves just yet.
Technical Signals to Watch
For traders watching the dollar, technical signals continue to offer valuable context beyond fundamental trends. On the DXY, recent price action has shown signs of exhaustion after a failed attempt to break above the 100 level, creating what could be a double-top pattern. If that level holds, it could indicate a shift in near-term momentum.
When looking at the bigger picture, Fibonacci retracement levels from the 2022 high to the 2023 low show that the dollar is starting to run into resistance just above 101. At the same time, the relative strength index (RSI) hasn’t been following price moves the way it usually does. It hasn’t kept up with the move in price, which can be an early sign that momentum is starting to fade.
In major pairs like USD/JPY and EUR/USD, the levels to keep an eye on are resistance near 157 and support around 1.07. Being aware of how these areas hold or give way can help traders spot shifts as they start to take shape.
Key FX Pairs
As central banks respond differently to inflation and slowing growth, a few major FX pairs are starting to show signs of volatility. One of the most closely watched is USD/JPY, which has climbed sharply in recent months as the gap between U.S. and Japanese interest rates remains wide. Technical setups on Slope suggest that the trend could continue for now. Japan’s cautious approach to tightening continues to fuel the carry trade, where investors borrow in yen and seek higher returns in dollars, something that tends to boost the pair.
EUR/USD has been stuck in a range, but pressure is building while many traders are monitoring community-based EUR/USD setups that might indicate a possible shift. With the European Central Bank now easing while the Fed holds steady, the outlook for the pair could hinge on which side acts more decisively in the coming months.
In USD/CAD, oil prices continue to be a major driver. Since the Canadian dollar often moves with crude, any swings in energy markets can feed into short-term price action in this pair, especially if tied to rate expectations or supply disruptions.
Will The Dollar Stay On Top?
The dollar is still the most powerful, but the foundations that have kept it there, rate differentials, liquidity, and global trust, are starting to shift. With central banks moving in different directions and pressure building across key FX pairs, this isn’t a market that traders can afford to sleepwalk through. Keeping an eye on levels like 100 on the DXY and resistance near 157 on USD/JPY could offer early indicators to directional shifts.
The policy gap between the Fed and the ECB will also be worth tracking as rate expectations evolve. What matters now is staying grounded in the data. Let the technicals, the macro trends, and the policy signals guide the view, not just noise or sentiment.
Dominance doesn’t disappear all at once. It erodes quietly until the shift is already underway. The crown may still sit on the dollar’s head, but clever traders know even monarchs are vulnerable when the tides turn.
