Recently, I noticed something: the trend of the U.S. dollar doesn't seem so simple. Everyone is discussing rate cuts, but the logic behind the dollar's appreciation or depreciation is far more complex than expected.

Let's start with a basic concept. The USD exchange rate is the ratio of U.S. dollars to other currencies. For example, EUR/USD=1.04 means 1.04 dollars can exchange for 1 euro. When this number rises, it indicates the euro is appreciating and the dollar is depreciating; conversely, it means the dollar is appreciating. The U.S. dollar index measures the strength of the dollar relative to a basket of major currencies, currently oscillating between 90-100, down significantly from the 2022 high of 114.

There are four core factors influencing the dollar's appreciation or depreciation. First is interest rate policy. When interest rates are high, the dollar's attractiveness increases, capital flows in, and the dollar appreciates; when rates are low, capital moves to higher-yielding assets elsewhere, and the dollar weakens. But there's a key point—markets price in expectations ahead of actual rate cuts, not waiting until the rate is cut to start falling. Investors look at changes in rate cut expectations, usually judged through the Federal Reserve's dot plot.

Second is the supply of dollars, i.e., quantitative easing (QE) and quantitative tightening (QT). QE increases market liquidity, generally weakening the dollar; QT withdraws liquidity, pushing up interest rates. But this isn't absolute—the exchange rate is often the result of a combination of interest rate differentials, risk aversion demand, and global capital flows.

The third factor is international trade. The U.S. has maintained a long-term trade deficit, which should theoretically put downward pressure on the dollar. However, in reality, many countries reinvest the dollars earned from exports into U.S. Treasuries and stocks, creating a "trade deficit plus capital inflow" special combination, so actual exchange rate performance can't be judged solely by trade figures.

The last factor, often overlooked, is America's global influence. The dollar's status as the world's primary settlement currency stems from global trust in the U.S. But this advantage is being challenged. The de-dollarization wave is real—EUR, RMB, and cryptocurrencies are challenging dollar hegemony. Since 2022, many countries have begun reducing holdings of U.S. debt and increasing gold reserves. However, it's important to emphasize that the dollar remains the dominant reserve currency globally; currently, it's more of a "dollar plus multiple currencies" structure, which will exert structural pressure on the dollar for a long time but won't cause an abrupt collapse in the short term.

Looking back over the past 50 years, the dollar's trend has often been rewritten by major economic events. During the 2008 financial crisis, panic and capital flight to the dollar caused a sharp appreciation. During the COVID-19 pandemic in 2020, the U.S. printed a lot of money to rescue the economy, temporarily weakening the dollar, but it rebounded as the economy stabilized. The rate hike cycle from 2022 to 2023 pushed the dollar index to new highs. As we enter the rate-cut cycle of 2024-2025, the dollar's interest rate advantage is shrinking, and markets are gradually shifting from a one-sided strength to high-level oscillation.

Now, let's consider the situation in 2026. In Q1, non-farm payrolls remained strong, and inflation stubbornly persisted, repeatedly delaying rate cut expectations. The market's view of the Fed has shifted from expecting quick easing to a "slow, late, small" rate cut path. Some institutions even believe rates may stay unchanged throughout 2026, with a policy shift only possible in 2027.

But there's a key point— the Fed's current hawkish stance appears more data-driven than the start of a new structural rate hike cycle. If employment, wages, and core inflation begin to slow in the coming quarters, policy stance could shift back to neutral or even easing. 2027 might be the next policy turning point.

Based on this "slow, late, small" rate path, combined with long-term geopolitical and de-dollarization factors, the dollar is more likely to show high-level oscillation and slight weakening over the next year. But this doesn't mean the dollar will decline continuously. If new financial risks, geopolitical conflicts, or market panic emerge globally, capital could flow back into the dollar, as it remains the world's most important safe-haven currency. Meanwhile, the movement of the dollar index depends not only on the U.S. itself but also on the relative performance of its component currencies. If Europe cuts rates more slowly, Japan and other major economies adopt more accommodative policies, the dollar could remain resilient or even appreciate due to interest rate differentials.

De-dollarization is indeed a long-term trend, but it is a slow process measured in years. Central banks reducing holdings of U.S. Treasuries and increasing gold reserves are ongoing, but the dollar's core role in global reserves and settlement systems remains difficult to replace in the short term.

The impact of dollar trends on different assets is also worth noting. Gold tends to perform well when the dollar weakens and real interest rates fall, because gold is priced in dollars, making it cheaper to buy when the dollar depreciates. However, gold prices are also influenced by geopolitical risks, central bank buying, and risk sentiment. In equities, rate cuts tend to attract capital inflows, especially into tech and growth stocks, but if the dollar becomes too weak, foreign investors might shift to other markets. Cryptocurrencies usually benefit from a weaker dollar, as capital seeks assets to hedge inflation.

Regarding major currency pairs, for USD/JPY, Japan has ended its ultra-low interest rate policy, and capital inflows could push the yen higher, leading to a yen appreciation and a weaker dollar against the yen. For TWD/USD, Taiwan's interest rates follow the dollar, but domestic considerations suggest the TWD will appreciate modestly. For EUR/USD, the euro is relatively stronger than the dollar, but Europe's economic situation isn't very strong—high inflation but weak growth—so if the European Central Bank slowly cuts rates, the dollar might weaken slightly but not sharply.

In the short term, every small event can influence exchange rates. If you want to trade based on dollar fluctuations, you need to monitor CPI, non-farm payrolls, FOMC meetings, and dot plot releases that impact rate expectations. These short-term movements can be exploited for trading. If you're not doing intraday trading, you can use support and resistance levels of the dollar index, combined with policy differences between the U.S. and major central banks, to identify swing opportunities over weeks or months. For medium- to long-term investors, diversifying into gold, foreign exchange, and other assets can help hedge dollar volatility. When the dollar is oscillating at high levels or weakening, such allocations are usually more effective in balancing overall portfolio risk.