I’ve been watching the trend of the US dollar lately and found that market expectations for rate cuts have become increasingly volatile. To be honest, the logic behind this is far more complex than it looks on the surface.

Let’s start with a phenomenon: this year’s Q1 non-farm payroll data kept coming in above expectations, and inflation has also been difficult to bring down. As a result, market expectations for the Federal Reserve shifted directly from “rapid easing” to a rate-cut path that is “slow, late, and limited.” Even some institutions are discussing that interest rates could stay unchanged throughout 2026, with the possibility of a policy shift only in 2027. This back-and-forth in expectations directly affects the strength of the US dollar.

As for the US exchange rate, it is essentially the exchange ratio between the dollar and other currencies. A simple example: EUR/USD = 1.04 means that 1.04 US dollars can be exchanged for 1 euro. When this ratio rises, it means the euro is appreciating and the dollar is depreciating. But the dollar’s real impact isn’t in a single exchange ratio—it’s because it is the world’s main settlement currency. International trade settlement, foreign exchange reserves, and capital flows all can’t get around the US dollar. Therefore, changes in US interest rates influence the pulse of the entire global market.

I’ve noticed that the key factors driving the dollar’s movement are actually just a few. First is monetary policy, which is the most direct. When interest rates are high, money flows into the US dollar; when rates are low, capital may move to other markets offering higher returns, which puts downward pressure on the dollar. But there’s an important detail here: markets don’t wait until a rate hike or cut is confirmed before reacting; they price in expectations in advance. So, watching the dot plot matters more than watching the actual policy.

Second is the dollar’s supply—namely QE and QT. QE increases liquidity and suppresses yields, while QT withdraws liquidity and pushes yields higher. But this doesn’t mean QE will always depreciate the dollar or that QT will always strengthen it. The US exchange rate is often the outcome of interest rate differentials, demand for safe-haven assets, and global capital flows acting together—judging from just one factor isn’t enough.

Another factor that’s easy to overlook is the US’s global influence. The US dollar became the world’s main settlement currency because the world places its trust in the United States. But this advantage is being eroded. The trend of de-dollarization has become increasingly clear in recent years. Many countries are losing confidence in US Treasuries and are turning to gold instead. The rise of the euro zone, renminbi crude oil futures, and virtual currencies—all of these are challenging the dollar’s dominance. That said, it’s important to emphasize that the dollar is still the world’s primary reserve currency; it has shifted from the past where it stood alone to a “US dollar plus multiple currencies coexisting” structure. This will bring long-term structural pressure, but it won’t suddenly collapse in the short term.

Looking at history, the dollar’s trajectory is often influenced by major economic events. During the 2008 financial crisis, market panic and massive capital returning to the US pushed the dollar up sharply. During the 2020 COVID-19 pandemic, the US’s massive stimulus to stabilize the market temporarily weakened the dollar, but it later rebounded strongly as the US economy steadied. In the 2022 to 2023 rate-hike cycle, the US dollar index once reached a high of 114. After entering a rate-cutting cycle, the dollar index has already fallen by about 15% from that peak, and full-year 2025 is down nearly 9.5%, the largest annual decline since 2017. More recently, due to escalating geopolitical conflicts, the dollar has slightly rebounded under safe-haven demand and is now trading in a range between 90 and 100.

For 2026, my view is that the dollar is more likely to show high-range consolidation and a slightly weak-to-sideways pattern, rather than a one-way, large decline. The Federal Reserve’s current hawkish posture looks more like it is driven by data rather than signaling a new round of structural rate hikes. As long as employment, wages, and core inflation start to cool over the next few quarters, the policy stance could still have a chance to return to neutral or even easing. 2027 could be the next policy turning point.

But this doesn’t mean the dollar will fall all the way down. As long as new financial risks, geopolitical conflicts, or market panic emerge globally, capital may still flow back into the US dollar, because it remains one of the world’s most important safe-haven currencies in nature. At the same time, the US dollar index doesn’t depend only on the US itself; it also depends on the relative performance of its component currencies. If Europe cuts rates more slowly, or if Japan and other major economies adopt more accommodative policies, the dollar may also maintain resilience due to relative interest-rate spreads.

It’s also worth paying attention to how dollar depreciation affects different assets. Generally, a weaker dollar and falling real yields are beneficial for gold, because gold is priced in US dollars—when the dollar depreciates, the cost of buying gold becomes relatively cheaper. US rate cuts also tend to encourage capital inflows into the stock market, especially technology and growth stocks. For virtual currencies, dollar depreciation means a decline in the dollar’s purchasing power, which usually has a positive effect, because capital will look for assets that can hedge against inflation. Bitcoin is often called “digital gold,” and when the global economy is unstable, the dollar depreciates, or inflation rises, it is particularly likely to be viewed as a store of value.

Specifically for the major currency pairs, let’s look at each one. For USD/JPY: Japan has ended its ultra-low interest rate policy, and capital inflows could push the yen higher. In the future, the yen may appreciate, and USD/JPY could weaken. For TWD: Taiwan’s interest rates generally follow the US dollar, but Taiwan also has its own issues—for example, if they want to cool housing prices, they can’t simply cut interest rates recklessly. And because Taiwan is an export-oriented country, a weaker exchange rate is favorable for exports, so we expect the TWD to appreciate, but not by too much. For EUR/USD: currently, the euro’s exchange rate trend is relatively stronger than the dollar, but Europe’s economy isn’t in great shape either—inflation is still high, while growth is weak. If the euro zone central bank gradually eases policy and cuts rates, the dollar may weaken somewhat, but not to a large extent.

If you want to capture trading opportunities from US dollar exchange rate fluctuations, in the short term, every small event can affect the exchange rate. Keep an eye on CPI, non-farm payrolls, FOMC meetings, and the dot plot—these are the data points that shape rate expectations, and they can help you take advantage of short-term swings to go long or short. If you’re not doing intraday trading, you can use support and resistance levels of the US dollar index, combined with policy differences between the US and major central banks, to look for swing opportunities over several weeks to a few months. If you’re a medium- to long-term investor, you can use diversification across gold, foreign exchange, and other assets to hedge the risk of dollar volatility. When the dollar is consolidating at high levels or in a weakening phase, these allocations are usually more helpful for balancing your overall portfolio.

In the end, the strength or weakness of the US dollar is not just a financial-news topic—it directly affects our investment returns, asset allocation, and even retirement planning. Instead of passively waiting for exchange rates to rise and fall, it’s better to plan ahead and ride the trend.