I have been observing the trend of the US dollar recently and found an interesting phenomenon. From last year to now, the market's expectations for Federal Reserve rate cuts have been unpredictable, directly affecting the rhythm of the entire exchange rate market. In simple terms, every change in expectations of interest rate hikes or cuts for the US dollar is reshaping the flow of global capital.

I noticed that after the Fed started cutting rates in September 2024, everyone initially thought the dollar would weaken unilaterally, but it wasn't that simple. While rate cuts do indicate a narrowing of the US interest rate advantage, exchange rates are influenced not only by US policy but also by global risk sentiment, the stance of other major central banks, and the demand for safe-haven assets. This is why the US dollar index, which fell from a high of 114 in 2022 to the current range of 90-100, hasn't continued to plummet.

Regarding the relationship between US interest rate hikes and exchange rates, many people have a superficial understanding. When interest rates are high, the dollar's attractiveness increases, capital flows in, and the dollar appreciates. When interest rates are low, capital moves to other markets, and the dollar weakens. But this is just surface logic. The real core is that the market is extremely efficient and won't react only when rate hikes actually happen, nor will it act only when rate cuts are confirmed. The entire dollar exchange rate market is actually a continuous game of betting on the expectations of rate hikes or cuts.

After 2026, the situation becomes more complex. Non-farm payroll data continues to be strong, and inflation remains sticky, so the market's expectations for the Fed have shifted from "rapid easing" to a "slow, late, and limited" rate cut path. Some institutions even believe that rates may stay unchanged throughout 2026, with policy shifts not happening until 2027. But there's a key point: the Fed's current hawkish stance is more data-driven than the start of a new structural rate hike cycle. As long as employment, wages, and core inflation begin to slow, there is still a chance for policy to return to neutral or even easing.

Looking at the US money supply, quantitative easing (QE) and quantitative tightening (QT) also play roles. QE increases market liquidity, usually lowering bond yields; QT withdraws dollar liquidity, pushing some interest rates higher. But this shouldn't be simply understood as "QE always weakens the dollar, QT always strengthens it." The dollar exchange rate is often the result of the combined effects of interest rate differentials, risk demand, and global capital flows.

I am also observing the impact of the US trade deficit on the exchange rate. The US has a long-term trade deficit, which from a textbook perspective should put downward pressure on the dollar. But in reality, the dollars earned from exports are invested in US bonds, stocks, and other assets, creating a "trade deficit plus capital inflow" scenario. So, actual exchange rate performance can't be judged solely by trade figures.

Another factor not to be ignored is the trend of de-dollarization. Since the US abandoned the gold standard, the eurozone was established, the yuan's crude oil futures were launched, and cryptocurrencies emerged—all challenging the dollar's hegemony. Especially since 2022, many countries have lost confidence in the dollar and US Treasuries, turning to buy gold. This has created structural pressure on the dollar, but it won't collapse suddenly in the short term. The dollar remains the world's primary reserve currency, just shifting from being the sole dominant currency to a "dollar plus multiple currencies" arrangement.

Based on these factors, I believe that in the next year, the dollar is more likely to fluctuate within a high range and weaken slightly, rather than sharply depreciate. But this doesn't mean the dollar will keep falling. As long as new financial risks, geopolitical conflicts, or market panic emerge globally, capital may flow back into the dollar because it remains one of the most important safe-haven currencies worldwide.

Regarding specific exchange rates, USD/JPY is the most noteworthy. Japan has ended its ultra-low interest rate policy, and capital inflows could push the yen higher, so the yen may appreciate, and USD/JPY could weaken. As for the Taiwan dollar, Taiwan's interest rates tend to follow the US dollar, but domestic issues and the country's export-driven economy mean a weaker exchange rate benefits exports. So, during the US rate-cut cycle, the Taiwan dollar is expected to appreciate, but the magnitude won't be too large. EUR/USD remains relatively strong, but Europe's economic situation isn't very good—high inflation and weak growth—so if the European Central Bank gradually cuts rates, the dollar might weaken slightly but not significantly.

The dollar's trend also has a clear impact on different assets. A weaker dollar and declining real interest rates are more favorable for gold because gold is priced in dollars, and when the dollar depreciates, gold becomes cheaper to buy. US rate cuts tend to stimulate capital inflows into stocks, especially tech and growth stocks. When the dollar weakens, the cryptocurrency market often also benefits, as capital seeks assets to hedge against inflation.

If you want to seize trading opportunities from dollar exchange rate fluctuations, in the short term, you need to monitor data such as CPI, non-farm payrolls, FOMC meetings, and dot plots, which influence rate expectations. For those not trading intraday, using support and resistance levels of the dollar index, combined with policy differences between the US and major central banks, can help identify swing opportunities over weeks to months. For medium- to long-term investors, diversifying risk with gold, foreign exchange, and other assets can help manage dollar volatility. When the dollar is oscillating at high levels or weakening, such allocations are usually more effective in balancing the overall portfolio.