I've been watching the US dollar's trend lately and have noticed some quite interesting phenomena. Many people ask me what exactly causes the dollar to decline, but in fact, this question is much more complex than it seems.

Simply put, since the rate cuts began last year, the dollar's interest rate advantage has been shrinking. Everyone knows that when interest rates are high, capital flows into the dollar seeking higher returns, but when the Federal Reserve starts easing policy, the situation reverses. Money becomes cheaper, and investors naturally look for other more attractive assets. But this is only the surface reason.

The real reason affecting the dollar's decline is the changing global situation. The data from Q1 this year was actually quite strong; non-farm employment remained resilient, and inflation didn't come down as quickly as expected, so market expectations for rate cuts have been pushed back repeatedly. The Fed's current stance is more like a "slow, late, and cautious" approach, and some institutions even believe the entire 2026 year could see no change.

But here’s a key point— the Fed's hawkish stance is actually data-driven, not the start of a new rate hike cycle. As long as employment, wages, and core inflation begin to loosen, policy could still shift. So, the dollar's decline isn't solely a policy issue; more so, it's the market digesting this uncertainty.

Another major factor is the de-dollarization trend. This isn't news anymore, but it is accelerating. Central banks around the world are reducing holdings of US Treasuries and increasing gold reserves, the eurozone and RMB internationalization, and the rise of cryptocurrencies are all eating into the dollar's dominance. Since 2022, this wave has become increasingly evident. Of course, the dollar remains the world's primary reserve currency and won't be replaced in the short term, but long-term structural pressures do exist.

The dollar index is now oscillating between 90 and 100, down 15% from the high of 114 in 2022. The full-year decline in 2025 is close to 9.5%, the largest annual drop since 2017. Recently, geopolitical tensions have flared up again, and some safe-haven buying has pushed the dollar higher, so currently it’s in a sideways consolidation, holding for nearly a year.

My view is that the main reasons for the dollar's decline come from three directions: first, narrowing interest rate differentials; second, the global search for alternatives to the dollar; third, market uncertainty about the Fed's policy direction. Overall, the dollar is more likely to fluctuate sideways with a slight bias toward weakness over the next year, rather than a sharp, one-way decline.

But that doesn't mean the dollar will keep falling indefinitely. If a financial crisis or geopolitical conflict occurs globally, capital will flow back into the dollar because it remains the most important safe-haven currency. Also, pay attention to the relative performance of constituent currencies—if Europe slows its rate cuts, Japan and other economies adopt more easing policies, the dollar could stay resilient due to interest rate differentials.

The impact on different assets is also worth noting. Gold usually benefits from a weakening dollar because gold priced in USD becomes cheaper. US stocks tend to attract funds in a rate-cut environment, but if the dollar becomes too weak, foreign investors might shift to other markets. Cryptocurrencies tend to perform better when the dollar depreciates and inflation rises. USD/JPY might weaken as Japan ends its ultra-low interest rate policy and capital flows back; the TWD is expected to appreciate in a rate-cut environment but with limited scope; the euro remains relatively strong, but Europe's economic situation isn't ideal either.

If you want to seize opportunities from dollar fluctuations, in the short term, focus on data like CPI, non-farm payrolls, and Fed meetings that influence rate expectations. In the medium term, you can look for trading opportunities based on the support and resistance levels of the dollar index combined with central bank policy differences. Long-term investors can diversify dollar risk through gold, forex, and other assets, adjusting allocations during periods of high dollar levels or weakening trends.

In summary, the reasons for the dollar's decline are not due to a single factor but are the result of a combination of policy, economic, geopolitical, and long-term structural changes. Instead of passively waiting for exchange rate fluctuations, it's better to plan ahead and follow the trend.