Recently, there has been increasing discussion in the market about the sharp decline of the US dollar, but I observe an interesting phenomenon: many people are actually mistaken about the true direction of the dollar.

First, let’s state the conclusion — by 2026, it’s unlikely that the dollar will experience a unilateral sharp decline; instead, it’s more likely to fluctuate at high levels with a weak correction pattern.

Why do I make this judgment? Because the factors influencing the dollar now are too complex. Last year, the Federal Reserve began cutting interest rates, and according to textbook logic, rate cuts should weaken the dollar. But in reality, recent non-farm payroll data has been consistently strong, and inflation remains stubbornly high, causing market expectations for rate cuts to fluctuate. From initially expecting rapid easing, expectations have shifted to a “slow, late, and limited” rate cut path. Some institutions even believe that rates may remain unchanged throughout this year, with a policy shift only expected next year.

The underlying logic is: the Fed’s current hawkish stance is more data-driven rather than the start of a new structural rate hike cycle. As long as employment, wages, and core inflation begin to slow in the coming quarters, there’s still a chance for policy to return to neutral or even easing.

Speaking of the long-term trend of the dollar, one cannot ignore the real trend of de-dollarization. Over the past few years, many countries have indeed started reducing their holdings of US Treasuries and increasing gold reserves. Europe, Japan, and even emerging markets are seeking alternatives. But here’s a key point: de-dollarization is a slow process measured in “years,” not something that will cause the dollar index to drop from 100 to 90 within 12 months. The dollar’s central role in global reserves and settlement systems remains difficult to replace in the short term.

Historically, the strength or weakness of the dollar has never been solely about interest rate hikes or cuts. During the 2008 financial crisis, market panic led to a massive flight to the dollar, causing it to appreciate sharply. During the COVID-19 pandemic in 2020, the US’s massive money printing initially weakened the dollar temporarily, but it rebounded strongly as the economy stabilized. In the 2022-2023 rate hike cycle, the dollar index once surged to 114. Now, as the cycle shifts to rate cuts, the dollar is beginning to retreat from high levels, but this process is not a straight line downward.

There are four key factors that influence the dollar: first is US interest rate policy, which is the most direct driver. But the focus isn’t just on whether rates are rising or falling now, but on market expectations for future policy — which can often be gauged through the dot plot. Second is the supply of dollars, i.e., quantitative easing (QE) and quantitative tightening (QT), which affect market liquidity and interest rates. Third are trade deficits and capital flows. The US has maintained a trade deficit for a long time, but at the same time, it is the world’s largest capital market, with many countries reinvesting their export earnings into US Treasuries and stocks, creating a “trade deficit plus capital inflow” unique combination. Lastly is US global influence. The dollar’s status as the main global settlement currency stems from worldwide trust in the US. As long as the US remains strong politically, economically, and militarily, the dollar will not depreciate significantly.

Currently, the dollar index oscillates between 90 and 100, a range it has maintained for nearly a year. Since the escalation of geopolitical conflicts, the dollar has seen some rebound driven by safe-haven buying, but the direction remains uncertain. This stalemate reflects the market’s real dilemma: the dollar faces long-term downward pressure (de-dollarization, narrowing interest rate differentials), yet short-term support (safe-haven demand, relative interest rate spreads).

For investors, this environment actually contains opportunities. In the short term, every CPI, non-farm payroll, and FOMC meeting data can influence exchange rates. For short-term trading, it’s crucial to closely monitor the release times of these economic indicators and trade based on expectations versus actual data. For swing trading, one can use support and resistance levels of the dollar index, combined with policy differences between the US and major central banks, to find opportunities spanning weeks to months. For medium- to long-term investors, instead of passively waiting for a sharp dollar decline, it’s better to diversify dollar risk with assets like gold, foreign exchange, and other assets. When the dollar is at high levels and oscillating or weakening, such asset allocation can better balance the overall portfolio.

Finally, it’s important to emphasize that the dollar exchange rate is not only about the dollar index but also about the relative performance of its component currencies. If Europe cuts rates more slowly, Japan and other economies adopt more easing policies, the dollar may still remain resilient due to relative interest rate differentials. This explains why sometimes the dollar appears to be weakening but remains stable — because it’s a relative game.