Recently, I noticed a quite interesting phenomenon—expectations of U.S. dollar interest rate hikes are fluctuating, which actually influences the entire global financial market.

Simply put, the U.S. dollar exchange rate is the ratio of the U.S. dollar to other currencies. For example, EUR/USD=1.04 means 1.04 dollars can exchange for 1 euro. But what truly determines the strength of the dollar is not only U.S. policy but also the actions of major central banks like Europe and Japan. If everyone cuts interest rates simultaneously, the dollar may not necessarily fall significantly because exchange rates compare relative attractiveness.

Currently, the U.S. dollar index is oscillating between 90 and 100. In 2022, it surged to a high of 114, then declined by about 15%. In 2025, it fell nearly 9.5% for the year, the largest annual decline since 2017. However, with geopolitical conflicts escalating, the dollar has rebounded slightly driven by safe-haven buying, and after entering 2026, it has mostly moved sideways.

The factors influencing the dollar exchange rate are quite complex, but the core ones are these. U.S. interest rate policy is the most direct driver—high rates increase the dollar’s attractiveness, attracting capital; low rates cause funds to flow to other markets. But there's a key point: investors shouldn’t just look at rate hikes or cuts themselves but also at market expectations for future policies. Because the dollar market is highly efficient—it won’t rise only after rate hikes are confirmed, nor fall only after rate cuts are certain.

The total supply of dollars (QE and QT) is also very important. Quantitative easing increases liquidity, quantitative tightening withdraws dollars, but this doesn’t necessarily mean QE always devalues the dollar or QT always appreciates it. The dollar exchange rate is often the result of the combined effects of interest rate differentials, safe-haven demand, and global capital flows.

Another easily overlooked point—America’s long-term trade deficit theoretically puts downward pressure on the dollar. But since the dollar is also the world’s primary reserve currency, many countries and institutions invest the dollars earned from exports into U.S. Treasuries and stocks, creating a unique combination of trade deficits and capital inflows. So, actual exchange rate performance can’t be judged solely by trade figures.

Talking about the global influence of the dollar, that’s the fundamental reason. The dollar became the main global settlement currency because of worldwide trust in the U.S. But this status is now facing challenges—usage of the euro and yuan is expanding, and de-dollarization trends are becoming more apparent. Since 2022, many countries have lost confidence in U.S. debt and shifted to buying gold. However, it’s important to emphasize that the dollar remains the world’s most important reserve currency; it has just shifted from being dominant to coexisting with multiple currencies. This will exert structural pressure on the dollar for a long time, but it won’t suddenly collapse in the short term.

Understanding the history helps explain the dollar’s temperament. During the 2008 financial crisis, panic and massive capital flight to the dollar caused it to appreciate sharply. During the COVID-19 pandemic in 2020, the U.S. printed a lot of money to rescue the economy, causing the dollar to weaken temporarily, but it rebounded strongly as the economy stabilized. The rate hike cycle from 2022 to 2023 pushed the dollar index to new highs. As we enter the rate cut cycle of 2024 and 2025, the dollar’s interest rate advantage is shrinking, and markets are gradually shifting from a one-sided strength to high-level oscillation.

Currently, in Q1 2026, non-farm payroll data remains strong, and inflation remains sticky. Market expectations for the Federal Reserve have shifted from expecting rapid easing to a slower, later, and smaller rate cut path. Some institutions even believe that rates may stay unchanged throughout 2026, with a policy shift only coming in 2027. But the key is that the Fed’s current hawkish stance appears more data-driven rather than the start of a new structural rate hike cycle. As employment, wages, and core inflation begin to slow in the coming quarters, policy stance could return to neutral or even easing.

Based on this slow, late, and small rate path, combined with long-term geopolitical and de-dollarization factors, the dollar is more likely to remain in a high-level oscillation or sideways correction rather than a sharp decline in the next year. But this doesn’t mean the dollar will keep falling—whenever new financial risks or geopolitical conflicts emerge globally, capital may flow back into the dollar because it remains one of the most important safe-haven currencies.

It’s also important to note that the dollar index depends not only on the U.S. itself but also on the relative performance of its component currencies. Japan has ended its ultra-low interest rate policy, which could lead to a yen appreciation, and the USD/JPY might weaken. The Taiwan dollar tends to follow the dollar, but Taiwan also faces its own issues, so the NT dollar is expected to appreciate modestly. The euro is relatively stronger than the dollar, but Europe’s economy is also weak, with high inflation and sluggish growth.

The impact of the dollar’s trend on different assets is also worth paying attention to. A weakening dollar is usually positive for gold because gold is priced in dollars, so a weaker dollar makes gold cheaper to buy. U.S. rate cuts tend to boost stock markets, especially tech and growth stocks. Cryptocurrencies also benefit because a weaker dollar reduces purchasing power, prompting funds to seek assets that hedge inflation, with Bitcoin often viewed as digital gold in this environment.

If you want to invest based on dollar exchange rate fluctuations, in the short term, you should monitor data releases that influence rate expectations—CPI, non-farm payrolls, FOMC meetings, and dot plots. In the medium term, support and resistance levels of the dollar index, combined with policy differences between the U.S. and major central banks, can help identify trading ranges over weeks to months. Long-term investors can diversify risk with gold, forex, and other assets. When the dollar is oscillating at high levels or weakening, such allocations are usually more effective in balancing overall portfolios.