I have been closely monitoring the trend of the US dollar exchange rate recently and found that market opinions on the dollar's future direction are becoming increasingly complex. Speaking of which, the reasons for the dollar's strength are not as simple as most people think; they involve multiple intertwined factors such as interest rate policies, geopolitical issues, and risk aversion demands.

First, let's discuss the basic concepts. The US dollar exchange rate is essentially the exchange ratio between the US dollar and other currencies. For example, EUR/USD=1.04 means that 1.04 dollars can exchange for 1 euro. When this ratio rises, it indicates euro appreciation and dollar depreciation; conversely, it means dollar appreciation. The US Dollar Index is more complicated; it not only reflects the situation in the US itself but also considers the relative policies of major central banks like Europe and Japan.

Regarding the reasons for the dollar's strength, the most direct factor is interest rates. When interest rates are high, the dollar is more attractive, attracting capital inflows; when rates are low, capital tends to flow to higher-yielding alternatives. But here’s a key point: the market reacts not to current rate hikes or cuts but to expectations of future policies. The entire foreign exchange market is highly efficient and won't wait until central banks officially announce changes before adjusting.

In the first half of this year, non-farm employment data remained strong, and inflation remained sticky without clear signs of easing, which repeatedly delayed market expectations for the Federal Reserve to cut interest rates. Currently, the consensus is that rate cuts will be "slow, late, and small," with some institutions even believing that rates may remain unchanged throughout the year. But it’s important to understand that the Fed’s hawkish stance is mainly data-driven, not the start of a new rate hike cycle. As long as employment, wages, and core inflation begin to slow in the coming quarters, policy could still shift toward easing.

Besides interest rates, the supply of US dollars is also crucial. Quantitative easing (QE) increases market liquidity, while quantitative tightening (QT) reduces it. But this does not necessarily mean QE always weakens the dollar or QT always strengthens it. The exchange rate is often the result of the combined effects of interest rate differentials, risk aversion, and global capital flows.

Another often overlooked factor is international trade. The US has a long-term trade deficit, which, according to textbook logic, should put downward pressure on the dollar. However, the dollar is also the world’s primary reserve currency, and the dollars earned from exports are often reinvested into US Treasuries and stocks, creating a unique combination of "trade deficit + capital inflow." This is why actual exchange rate performance cannot be judged solely by trade figures.

The deepest layer is the US’s global influence. The dollar’s status as the main global settlement currency fundamentally stems from worldwide trust in the US. Currently, the main challengers to the dollar are the euro and the renminbi. As long as the US maintains dominance in politics, economy, and military strength, the dollar will not depreciate significantly. However, in recent years, there has been a wave of "de-dollarization," with the eurozone forming, the renminbi crude oil futures emerging, and cryptocurrencies rising. Since 2022, many countries have lost confidence in US debt and turned to gold, all challenging the dollar’s position. Nonetheless, it’s important to note that the dollar remains the world’s most important reserve currency; it has shifted from being overwhelmingly dominant to a "multi-currency coexistence" model. This will exert structural pressure on the dollar over a long period but is unlikely to cause a sudden collapse in the short term.

Historically, the US dollar index has gone through several key phases. During the 2008 financial crisis, capital flooded back into the dollar, causing a sharp appreciation. During the COVID-19 pandemic in 2020, US money printing to rescue the economy temporarily weakened the dollar, but as the economy stabilized, it rebounded strongly. In 2022-2023, a rapid rate hike cycle pushed the dollar index to new highs. Entering 2024-2025 with a rate cut cycle, the dollar shifted from a one-sided strength to high-level oscillation. These histories tell us that the dollar cannot be judged solely by rate hikes or cuts but must be viewed in conjunction with policies, economic conditions, and risk events.

Based on the current "slow, late, and small" interest rate path, combined with long-term geopolitical and de-dollarization factors, my view is that the dollar is more likely to fluctuate at high levels and weaken slightly over the next year rather than sharply depreciate. But this does not mean the dollar will decline all the way down. As long as new financial risks, geopolitical conflicts, or market panic emerge globally, capital may flow back into the dollar because it remains the world’s most important safe-haven currency.

At the same time, pay attention to the performance of the constituent currencies of the US dollar index. If Europe cuts rates more slowly, Japan and other major economies adopt more accommodative policies, the dollar could remain resilient due to interest rate differentials. De-dollarization is indeed a long-term trend, but it is a slow process measured in "years," and it won’t cause the dollar index to drop from 100 to 90 within the next 12 months.

The impact of dollar movements on different assets is also quite clear. A weakening dollar is usually positive for gold because gold is priced in dollars, so a weaker dollar makes gold cheaper. US rate cuts tend to stimulate capital inflows into stocks, especially tech and growth stocks. In cryptocurrencies, a weaker dollar means reduced purchasing power, which often has a positive effect on crypto markets as capital seeks assets to hedge inflation.

Regarding different major currencies, for USD/JPY, Japan has ended its ultra-low interest rate policy, and capital inflows could push the yen higher, leading to a potential appreciation of the yen and a depreciation of the dollar against the yen. For the Taiwan dollar, Taiwan’s interest rates tend to follow the dollar, but domestic factors like housing controls and export orientation mean that during a rate-cut cycle, the TWD is expected to appreciate modestly. The euro is currently relatively stronger than the dollar, but European economic conditions are not very good—high inflation but weak growth. If the European Central Bank gradually cuts rates, the dollar may weaken slightly but not significantly.

If you want to seize trading opportunities from dollar exchange rate fluctuations, in the short term, focus on data that influence rate expectations, such as CPI, non-farm payrolls, and FOMC meetings, to capitalize on short-term volatility for long or short positions. For those not trading intraday, you can use support and resistance levels of the dollar index combined with policy differences among countries to identify swing opportunities over weeks or months. For medium- and long-term investors, diversifying with gold, foreign exchange, and other assets can help hedge against dollar volatility. When the dollar is oscillating at high levels or weakening, such allocations are usually more effective in balancing the overall portfolio. Ultimately, rather than passively waiting for exchange rates to fluctuate, it’s better to understand these logics early and follow the trend to position accordingly.