A question has been asked especially often lately: Will the US rate hikes make the US dollar rise? Actually, this question is backwards. Instead of asking whether rate hikes will cause the dollar to rise, you should first figure out the true logic behind how the dollar moves.

I’ve noticed that many people directly equate US rate hikes with US dollar appreciation, but in reality it’s not that simple. Since last year, the Federal Reserve has entered a rate-cutting cycle. According to conventional logic, the dollar should weaken—yet the reality is that the US dollar index has been oscillating between 90 and 100 without steadily falling. The key is that exchange rates compare relative attractiveness, not absolute values. If other countries also cut rates in sync, the dollar may not necessarily fall.

Look at past data to understand this logic. In 2022, the Fed raised rates aggressively, and the dollar index surged to a historical high of 114. In 2025, it fell 9.5% for the full year, marking the largest annual decline since 2017. But after entering this year, as geopolitical tensions have intensified, safe-haven capital has started flowing back into the dollar again—so we’re now seeing a situation of sideways consolidation at high levels. This stalemate has lasted nearly a year.

In fact, there are four factors that truly affect the dollar’s direction. First is monetary policy—this is the most direct driver. But there’s a key detail here: the market doesn’t wait until rate hikes are confirmed before buying the dollar, and it doesn’t wait until rate cuts are confirmed before selling. The whole market reacts in advance, so what you need to watch is changes in interest-rate expectations, not the current rate increases or decreases.

Second is the supply of dollars, namely QE and QT. Quantitative easing increases dollar liquidity, while quantitative tightening withdraws liquidity. But this is also not a simple cause-and-effect relationship—QE doesn’t necessarily lead to dollar depreciation, and QT doesn’t necessarily lead to dollar appreciation. Ultimately, the dollar’s outcome comes from the combined effects of interest-rate differentials, safe-haven demand, and global capital flows.

Third is the trade deficit. The US has long imported more than it has exported, which theoretically puts downward pressure on the dollar. But at the same time, the dollar is the world’s primary reserve currency. Many countries take the dollars earned from exports and reinvest them into US Treasuries and stocks, forming a special combination of “deficit plus capital inflow.” So judging exchange-rate trends based on trade numbers alone would be one-sided.

The fourth factor is often underestimated: the issue of the US’s global influence and credibility. The reason the dollar can become the world’s settlement currency is rooted in global trust in the US. But this advantage is being eroded. The de-dollarization wave is real—Eurozone, euro crude oil futures related to the People’s RMB, and virtual currencies are all challenging the dollar’s dominance. In particular since 2022, many countries have started losing confidence in US Treasuries and have turned to buying gold.

However, it’s important to emphasize that de-dollarization is a slow process measured in years. It will not cause the dollar index to drop directly from 100 to 90 within the next 12 months. Today, the dollar is still the world’s most important reserve currency—just shifting from a past “single winner” situation to a “the dollar plus multiple currencies coexist” pattern. This will bring structural pressure to the dollar over a long period of time, but it will not suddenly collapse in the short term.

Now let’s look at the outlook for 2026 to 2027. This year’s Q1 non-farm employment data remains relatively strong, and inflation has not been able to cool down due to stickiness. This has repeatedly pushed back the market’s expectations for rate cuts. Many institutions now believe that rates may remain unchanged throughout 2026, with a possible policy shift only in 2027. But this hawkish posture is more driven by data rather than the start of a new structural interest-rate hike cycle.

As long as employment, wages, and core inflation begin to slow over the next few quarters, the policy stance still has the chance to return to neutral or even become easing. 2027 could be the next turning point. But if rate hikes do happen, it’s more likely to be a modest tightening to combat sticky inflation, rather than repeating the fast rate-hike cycle of 2022 to 2023.

Based on this “slow, late, small” rate path, together with long-term geopolitical and de-dollarization factors, the dollar next year is more likely to show a pattern of high-level volatility and a slightly weak consolidation. But that doesn’t mean the dollar will fall continuously. As long as new financial risks or geopolitical conflicts emerge globally, capital could still flow back into the dollar, because it remains one of the world’s most important safe-haven currencies.

Another easily overlooked point is that the dollar index doesn’t just depend on the US itself—it also depends on the relative performance of the component currencies. If Europe cuts rates more slowly, or if Japan and other economies adopt more accommodative policies, the dollar may stay resilient due to relative interest-rate differentials. So instead of asking whether US rate hikes will make the dollar rise, it’s better to ask: Compared with other major economies, is the US’s relative attractiveness increasing or decreasing?

If you want to profit from dollar volatility, in the short term you need to closely watch data that affect interest-rate expectations, such as CPI, non-farm employment, FOMC meetings, and the dot plot. In the medium term, you can use support and resistance levels of the dollar index together with differences in central bank policies across countries to find opportunities for trades. For medium- to long-term investors, you can diversify the risk of dollar fluctuations by using gold, foreign exchange, and other assets. When the dollar is consolidating at high levels or moving into a weakening phase, these kinds of allocations often help balance the overall portfolio.