I’ve been thinking about a question lately—why do the US dollar’s ups and downs happen so frequently? Especially now, when expectations for interest-rate cuts keep coming and going, many people can’t quite figure out which direction the US dollar is actually heading.

In fact, the logic behind the dollar’s rise and fall isn’t that complicated, but it’s also far more than just “it goes up when rates are raised, and it goes down when rates are cut.” I’ve noticed many people overlook a key point: exchange rates are driven not by absolute policy, but by relative attractiveness.

First, the most direct factor—interest rates. When US interest rates are high, capital naturally flows into dollar-denominated assets, and the dollar appreciates as a matter of course. When rates are cut, the interest-rate spread narrows, and capital may shift to other markets. But there’s a catch: markets often react in advance. The dollar doesn’t necessarily have to wait for rate hikes to really happen—when market expectations change, the move starts right then. That’s why looking at the dot plot and tracking the Fed’s stance is often more important than focusing on the final decision.

Supply also affects the dollar. QE and QT sound complicated, but put simply, they mean the Federal Reserve injects money into the market or withdraws money from it. If more money is injected, pressure builds for the dollar to depreciate; if money is withdrawn, the dollar often strengthens somewhat. However, this isn’t absolute either—why the dollar rises also involves global risk sentiment, differences in central bank policies across countries, and even geopolitical factors.

The most interesting part is the trade deficit. The US has long been importing more than it exports, and according to economics textbooks, that should lead to dollar depreciation. But in reality, the dollars earned from US exports are heavily reinvested into US Treasuries and equities, forming a special cycle. That’s also why the answer to why the dollar rises is often surprising—simply looking at the trade numbers isn’t enough.

There’s another factor that’s often underestimated—America’s global credit. The dollar becoming a world reserve currency comes down to global trust in the US. But that trust is being challenged now. The de-dollarization wave is real: the euro, the renminbi, and even cryptocurrencies are all competing for market share. After the US left the gold standard, many countries began losing confidence in US Treasuries and turned to gold. This is a long-term structural pressure, but in the short term, the dollar’s core position is still hard to shake.

Look at the last 50 years and it becomes clear. During the 2008 financial crisis, capital rushed back into the dollar and the dollar appreciated. In 2020, during the pandemic, the US “printed money” in a big way—the dollar weakened temporarily but then rebounded. In 2022-2023, rapid rate hikes pushed the US dollar index to as high as 114. Now that we’re entering a rate-cut cycle, the dollar index has fallen by about 15% from that peak, but it hasn’t weakened in only one direction. Instead, it has repeatedly oscillated in the 90-100 range.

What we’re seeing now is that nonfarm payrolls are still holding up, and inflation isn’t easing enough to be brought down, so market expectations for the Federal Reserve have shifted from “rapid easing” to a rate-cut path of “slow, late, and small.” Some institutions even think rates could stay unchanged throughout 2026. But that looks more like a data-driven hawkish stance rather than the start of a new rate-hike cycle. As long as employment and inflation start to cool, the policy still has a chance to pivot toward easing.

Based on this logic, my view is that the answer to why the US dollar rises will become even more complex in the future. In the short term, the dollar is more likely to fluctuate at high levels rather than weaken sharply in a single direction. But as long as new global financial risks or geopolitical conflicts emerge, capital will still flow back into the US dollar, because at its core it remains the most important safe-haven asset.

At the same time, it’s important to note that the US dollar index isn’t just about the US on its own—it also depends on the relative performance of the component currencies. Japan has just ended ultra-low interest rates, so the Japanese yen could strengthen; as a result, the US dollar against the yen could depreciate. Europe’s economy is relatively weak, but inflation is still high—if the European Central Bank slows the pace of rate cuts, the dollar could actually stay resilient due to the relative interest-rate differential. The situation with the New Taiwan dollar is more special: Taiwan’s interest rates follow the dollar, but there are also its own domestic considerations. When the US cuts rates, the New Taiwan dollar may appreciate, but the move is expected to be limited.

De-dollarization is indeed a real trend, but it’s a slow, year-by-year process. It won’t make the US dollar index drop from 100 directly to 90 within 12 months. Central banks are reducing holdings of US Treasuries and increasing gold holdings, but in the short term the dollar’s central position in global reserves and settlement systems is still difficult to replace.

If you want to profit from US dollar volatility, in the short term you can focus on data such as CPI, nonfarm employment, and FOMC meetings—these will affect interest-rate expectations, helping you catch each small move. For a medium-term approach, you can use the US dollar index’s support and resistance levels together with differences in central bank policies to find opportunities for swings over the course of a few weeks to a few months. For long-term investors, you can diversify risk with gold, forex, and other assets to hedge against US dollar volatility. When the dollar is oscillating at high levels or moving into a weakening phase, these allocations typically help balance an overall portfolio.