Recently, there is a phenomenon worth paying attention to—expectations for U.S. interest-rate cuts have been repeatedly shifting, and the market’s forecasts for the USD exchange-rate trend in 2026 are becoming increasingly complex. Many people think that cutting rates automatically means the U.S. dollar must weaken, but in reality, it is far from that simple.

Simply put, the USD exchange rate is the conversion ratio between the U.S. dollar and other currencies. For example, the euro-to-dollar rate (EUR/USD) is currently 1.04, meaning 1.04 dollars can be exchanged for 1 euro. If this number rises, it indicates the euro is strengthening and the dollar is depreciating; the opposite is true as well. And the U.S. Dollar Index (DXY) is an indicator that measures the overall strength of the dollar—it reflects the dollar’s performance against a range of major currencies.

I noticed that early this year, the non-farm employment data has been strong, and inflation hasn’t been coming down, which has caused the market to keep pushing back expectations for Federal Reserve rate cuts. People now generally believe the pace of rate cuts will be “slow, late, and small.” Some institutions even predict that throughout 2026, interest rates could remain unchanged, with a real shift potentially not happening until 2027. But the key point is that the Fed’s current hawkish stance is driven more by data than by the start of a new rate-hike cycle. As long as employment, wages, and core inflation begin to slow, there is still a chance for policy to pivot toward easing.

There are actually many factors that affect the USD exchange rate. First is interest-rate policy—when rates are high, the dollar becomes more attractive and money flows in; when rates are low, capital moves to other markets and the dollar may weaken. However, investors can’t just look at whether the market is currently hiking or cutting rates—they also need to focus on market expectations for the future, which can often be seen from the Fed’s dot plot. Because the FX market reacts extremely quickly, it won’t wait until rate cuts are confirmed before selling pressure starts to show up.

Second is the supply of dollars—namely quantitative easing (QE) and quantitative tightening (QT). QE increases market liquidity and pushes down bond yields; QT withdraws liquidity and pushes up interest rates. But this doesn’t mean QE will necessarily cause the dollar to depreciate, or QT will necessarily cause it to appreciate. The USD exchange rate is often the result of a combination of interest-rate differentials, demand for hedging/safe-haven, and global capital flows.

Another factor that is easy to overlook is the U.S. trade deficit. The U.S. has long imported more than it exports, which theoretically creates downward pressure on the dollar. But at the same time, the dollar is the world’s most important reserve currency. Many countries take the dollars earned from exports and reinvest them into U.S. Treasuries and stocks, forming a special combination of “trade deficit plus capital inflows.” Therefore, actual exchange-rate performance can’t be judged by trade figures alone.

Finally, the U.S.’s global influence and credit are also crucial. The dollar can become the global settlement currency because the world places trust in the United States. But this advantage is facing challenges. Since the U.S. moved away from the gold standard, the de-dollarization trend has become increasingly clear—such as the establishment of the eurozone, yuan crude oil futures, the rise of virtual currencies, and since 2022, many countries starting to reduce their holdings of U.S. debt and increase their gold reserves. That said, it’s important to clarify that the dollar is still the world’s primary reserve currency; it has simply shifted from a past situation of “one currency dominating everything” to a structure where “the dollar coexists with multiple currencies.” This will bring structural pressure on the dollar over a long period, but it will not suddenly collapse in the short term.

If you look at history, you can understand why the USD exchange rate is often affected by major economic events. During the 2008 financial crisis, funds flowed back into the dollar in large amounts, and the dollar rose sharply; during the COVID-19 pandemic in 2020, the U.S. flooded the market with money to stabilize the system—this temporarily weakened the dollar, but it later rebounded. From 2022 to 2023, the rate-hike cycle pushed the DXY higher. After entering the rate-cut cycle in 2024, the dollar shifted from one-sided strength to high-level consolidation. These historical examples tell us that you can’t judge the dollar by “rate hikes or rate cuts” alone—you need to look at policy, the economy, and risk events together.

Based on the current “slow, late, and small” interest-rate path, along with long-term geopolitical and de-dollarization factors, forecasts for the USD exchange-rate trend suggest that over the next year it is more likely to show a pattern of high-level consolidation and a slightly weak bias, rather than a one-way, major weakening. But this doesn’t mean the dollar will fall continuously. As long as new financial risks emerge globally, geopolitical conflicts escalate, or markets panic, capital may still flow back into the dollar, because—at its core—it remains one of the most important safe-haven currencies in the world.

The USD trend has a major impact on different assets. A weakening dollar is usually favorable for gold, because gold is priced in dollars—so when the dollar depreciates, buying gold becomes relatively cheaper. U.S. rate cuts also tend to encourage capital inflows into the stock market, especially technology and growth stocks. When the dollar weakens, the cryptocurrency market usually benefits as well, because funds seek assets that can hedge against inflation—at times like this, Bitcoin as “digital gold” receives particular attention.

Looking at major currency pairs, the Japanese yen has been relatively more promising lately. After Japan ends ultra-low interest rates, capital inflows may push the yen higher, so the yen could appreciate and USD/JPY could weaken. For the Taiwan dollar, interest rates in Taiwan tend to follow the dollar, but there are also domestic considerations—such as the fact that housing-market controls mean rate cuts can’t be done recklessly. In addition, as Taiwan is export-oriented, a lower exchange rate benefits exports. So, the NT dollar is expected to appreciate during the Federal Reserve’s rate-cut cycle, but the magnitude won’t be too large. The euro has performed somewhat stronger than the dollar. However, Europe’s economic situation itself isn’t very optimistic—while inflation is still high, growth is weak. If the European Central Bank gradually cuts rates, the dollar may weaken somewhat, but it won’t depreciate drastically.

To capture trading opportunities from USD exchange-rate fluctuations, in the short term, you should focus on data such as CPI, non-farm employment, FOMC meetings, and the dot plot—these influence interest-rate expectations, and each announcement can trigger volatility. If you’re not doing intraday trading, you can use support and resistance levels of the USD index, combined with policy differences between the U.S. and major central banks, to look for swing opportunities over a few weeks to a few months. For medium- to long-term investors, diversifying by using gold, forex, and other assets to spread out the risk of USD fluctuations can usually help better balance the overall portfolio during periods when the dollar is consolidating at high levels or turning weaker.