I’ve been thinking about a question lately: will the dollar rise when the Fed raises interest rates? Conversely, does cutting rates really mean the dollar will definitely fall? Actually, it’s not that simple.

Since last year, I’ve noticed that the US Dollar Index has been swinging in a range of 90–100. Behind this phenomenon is the market’s repeated, shifting expectations about the direction of Federal Reserve policy. During the rapid rate-hike cycle in 2022, the dollar did indeed rocket to around 114—but the current situation is completely different.

The key to whether “rate hikes will make the dollar rise” comes down to “relative attractiveness.” If the US raises interest rates, but Europe and Japan also raise rates at the same time, the dollar may not necessarily strengthen. Exchange rates aren’t determined by absolute interest rates; they’re driven by interest rate differentials between countries. Right now, the Fed’s stance looks more data-driven than like a fresh round of structural rate hikes, and that’s important.

Data from this year’s Q1 shows non-farm employment remains relatively strong, and inflation is still sticky—so market expectations for rate cuts keep getting pushed back. Many institutions now believe the Fed may hold rates steady until 2027 before shifting policy. But that doesn’t mean the dollar will rise in a straight line, because other factors are at play as well.

For example, de-dollarization is a real long-term trend. Central banks are reducing their holdings of US Treasuries and increasing their gold reserves, which creates structural pressure on the dollar. However, this is a gradual process measured in years, so in the short term the US Dollar Index won’t drop directly from 100 to 90. Geopolitical risks also tend to boost safe-haven demand, and capital could flow back into the dollar at any time.

My observation is that over the next year, the dollar is more likely to show high-level consolidation and a generally weak undertone. It won’t be one-way, sharply weakening, and it won’t be continuously strong either—rather, it will keep getting pulled back and forth between policy uncertainty and the long-term de-dollarization trend.

From an investment perspective, for the question “will the dollar rise when rates are increased,” in the short term you should pay attention to data such as CPI, non-farm employment, and FOMC meetings. Each release can bring volatility. But if you’re not doing intraday trading, you can use support and resistance levels of the US Dollar Index to find swing-trading opportunities, or hedge dollar risk with gold and other assets.

What’s especially worth noting is that the performance of the component currencies of the US Dollar Index matters as well. For instance, if the Bank of Japan ends its ultra-low interest-rate policy, the yen could strengthen, and the USD/JPY pair could move lower. Europe’s economy is relatively weak, but inflation remains high, so the rate-cut pace of the European Central Bank may be slower than the Fed’s—this could again support the dollar’s relative strength. In a US rate-cutting cycle, the Taiwan dollar is expected to appreciate, but the magnitude likely won’t be that large.

In the end, whether rate hikes make the dollar rise depends on the relative picture. Looking only at US policy isn’t enough—you also have to see what other major central banks are doing. In today’s market environment, the dollar isn’t a clear buy point or a clear sell point; instead, it’s a choppy trading range full of opportunities.