I have been closely watching the trend of the US dollar exchange rate recently and found that the repeated expectations of interest rate cuts really have a significant impact on the entire market. Speaking of which, the US dollar is essentially the world's most important settlement currency, and its appreciation or depreciation not only affects the United States but also influences global capital flows.

In September 2024, the Federal Reserve will begin cutting interest rates. Normally, the US dollar should weaken, but the actual situation is much more complex. A rate cut means money becomes cheaper, and capital might flow into risk assets, but the dollar may not necessarily weaken unilaterally. Exchange rates are also affected by global risk sentiment, other central bank policies, and safe-haven demand. That’s why, when I look at the dollar’s ups and downs now, I consider not only interest rates but also relative attractiveness.

I notice that currently, the US dollar index is fluctuating between 90 and 100. It peaked around 114 in 2022 and has since fallen about 15%. For the full year of 2025, it is expected to decline nearly 9.5%, the largest annual drop since 2017. However, after geopolitical conflicts escalated, the dollar rebounded slightly due to safe-haven buying, and this stalemate has lasted almost a year now.

Several key factors influence the US dollar exchange rate. First is interest rate policy. Higher interest rates increase the dollar’s attractiveness, attracting capital; lower rates make capital seek higher returns elsewhere. But there’s an often-overlooked point: the market reacts in advance. It doesn’t wait for confirmed rate hikes for the dollar to rise, nor for confirmed rate cuts to fall. Investors need to watch for changes in expectations of rate hikes or cuts, which are usually indicated by the Federal Reserve’s dot plot.

Second is the supply of US dollars. Quantitative easing (QE) increases liquidity, while quantitative tightening (QT) withdraws it. But this doesn’t mean QE necessarily causes the dollar to depreciate, nor does QT necessarily cause it to appreciate. The exchange rate is often the result of the combined effects of interest rate differentials, safe-haven demand, and global capital flows.

Another factor is the trade deficit. The US has long imported more than it exports, which theoretically puts downward pressure on the dollar. But the dollar is also the world’s primary reserve currency, with many countries’ institutions reinvesting the dollars earned from exports into US bonds, stocks, and other assets. So, actual exchange rate performance cannot be judged solely by trade figures.

Finally, the US’s global influence plays a role. The dollar’s status as the main settlement currency stems from global trust in the US. As long as the US maintains strength in politics, economy, and military power, the dollar won’t depreciate significantly. However, this advantage is now facing challenges. Since 2022, the trend of de-dollarization has become more apparent, with many countries losing confidence in US debt and turning to gold instead. Still, it’s important to emphasize that the dollar remains the world’s most important reserve currency; it’s just that, compared to the past where it was dominant, now it exists alongside multiple currencies. This long-term structural pressure will persist for a while but won’t cause an abrupt collapse in the short term.

Historically, the dollar exchange rate has often been affected by major economic events. During the 2008 financial crisis, market panic led to a massive flight into the dollar, causing a sharp appreciation. During the COVID-19 pandemic in 2020, the US engaged in massive money printing to rescue the economy, which temporarily weakened the dollar, but as the economy stabilized, it rebounded strongly. From 2022 to 2023, during the rate hike cycle, US interest rates rose rapidly, pushing the dollar index to new highs. Moving into 2024 and 2025, as the cycle shifts to rate cuts, the dollar’s interest rate advantage begins to narrow, and the market transitions from a one-sided strength to high-level oscillation. These historical patterns tell us that the dollar’s direction isn’t determined solely by interest rate hikes or cuts.

Looking ahead to Q1 2026, non-farm payroll data remains strong, and inflation remains sticky. This has repeatedly delayed market expectations for rate cuts. The market’s view of the Federal Reserve has shifted from expecting quick easing to a “slow, late, and cautious” rate cut path. Some institutions even believe that rates may stay unchanged throughout 2026, with a policy shift possibly occurring only in 2027.

But the key point is that the Fed’s current hawkish stance is more data-driven rather than the start of a new structural rate hike cycle. As long as employment, wages, and core inflation begin to slow in the coming quarters, there’s still a chance for the policy stance to return to neutral or even easing. 2027 could be a turning point, but if rate hikes do occur, they are more likely to be small tightenings aimed at combating sticky inflation rather than the rapid rate hike cycle seen in 2022–2023.

Based on this “slow, late, and cautious” interest rate path, combined with long-term geopolitical and de-dollarization factors, I believe the dollar is more likely to experience high-level oscillation and slight weakening over the next year rather than a sharp decline. However, this doesn’t mean the dollar will fall continuously. Whenever new financial risks, geopolitical conflicts, or market panic arise globally, capital may flow back into the dollar because it remains one of the most important safe-haven currencies.

At the same time, it’s important to note that the dollar index’s movements are not only influenced by the US itself but also by the relative performance of its component currencies. If Europe delays rate cuts or Japan and other major economies maintain looser policies, the dollar could remain resilient due to interest rate differentials.

De-dollarization is a real long-term trend, but it’s a slow process measured in years. It’s unlikely that within the next 12 months, the dollar index will drop directly from 100 to 90. While central banks are indeed reducing holdings of US Treasuries and increasing gold reserves, the dollar’s core position in global reserves and settlement systems remains difficult to replace in the short term.

The impact of dollar movements on different assets is also worth noting. Generally, a weaker dollar and declining real interest rates tend to favor gold, because gold is priced in dollars, and when the dollar depreciates, gold becomes cheaper to buy. US rate cuts tend to stimulate capital inflows into stocks, especially tech and growth stocks. When the dollar weakens, it also means a decline in dollar purchasing power, which often positively influences the cryptocurrency market as capital seeks assets to hedge inflation.

Monitoring the dollar against other major currencies is also crucial. For example, with Japan ending its ultra-low interest rate policy, capital may flow back into the yen, pushing it higher, and the dollar may weaken against the yen. Regarding the Taiwan dollar, Taiwan’s interest rates tend to follow the US dollar, but given domestic issues and its export-driven economy, a lower exchange rate benefits exports. Therefore, during a US rate cut cycle, the Taiwan dollar is expected to appreciate, but the magnitude probably won’t be large. As for the euro, currently, the euro’s exchange rate is relatively stronger than the dollar, but Europe’s economic situation isn’t very good—high inflation but weak growth. If the European Central Bank gradually cuts rates, the euro might weaken slightly, but a significant depreciation is unlikely.

To seize trading opportunities from dollar fluctuations, short-term traders should pay attention to each event that could influence the exchange rate. If you want to profit from dollar movements, it’s essential to track the timing of economic data releases and analyze them carefully. Short-term opportunities can be found by focusing on CPI, non-farm payrolls, FOMC meetings, and dot plots, which influence rate expectations, allowing for quick long or short trades. For those not engaging in intraday trading, using support and resistance levels of the dollar index, combined with policy differences between the US and major central banks, can help identify swing opportunities over weeks or months. Long-term investors can diversify their risk by holding assets like gold, foreign exchange, and other instruments to hedge against dollar volatility. When the dollar is oscillating at high levels or weakening, such allocations can help balance the overall portfolio.