Recently, there has been a lot of discussion about the US dollar exchange rate. I’ve found that many people still don’t really understand how the dollar actually rises and falls—they just look at news about rate hikes or cuts and make judgments accordingly. But in reality, it’s far more complex.

To start with the most straightforward explanation: the US dollar exchange rate is simply the exchange ratio between US dollars and other currencies. Taking the euro as an example, if EUR/USD equals 1.04, it means that 1.04 US dollars can be exchanged for 1 euro. When this number moves upward, the euro appreciates and the US dollar depreciates; when it moves downward, the euro depreciates and the US dollar appreciates. But to assess the dollar’s true strength, you also need to look at the US Dollar Index, which reflects the dollar’s performance against major currencies.

I’ve noticed that the US Dollar Index is currently fluctuating between 90 and 100. Compared with the high point in 2022, it has already fallen quite a lot. The trend this year is particularly interesting because market expectations for rate cuts have been changing all the time. Earlier, everyone expected rapid easing, but now the market has shifted to a “slow, late, and small” rate-cut path. Even some institutions believe that throughout this whole year, interest rates might remain unchanged.

Why is this happening? Mainly because employment data remains strong, and inflation can’t be brought down. The Federal Reserve may look hawkish, but this is more driven by data rather than the start of a new interest-rate-hike cycle. As long as employment and wages cool down, there is still a chance that policy could shift toward easing.

When it comes to the core factors behind the dollar’s rise and fall, I think there are four key ones. First is US interest rate policy, which is the most direct. When interest rates are high, the dollar’s appeal is stronger and capital flows in; when rates are low, the opposite happens. But investors should never look only at interest rate hikes or cuts themselves—they need to consider market expectations for the future, which is often visible in the Federal Reserve’s dot plot. Markets are very efficient; they won’t wait until rate cuts are confirmed before people start selling the dollar.

Second is the supply of dollars—namely, quantitative easing and quantitative tightening. QE increases liquidity and pushes yields down; QT withdraws dollars and pushes interest rates up. But this doesn’t mean that QE will always cause the dollar to depreciate, or that QT will always cause the dollar to appreciate. Dollar exchange rates are often the result of several factors working together, such as interest rate differentials, demand for hedging/safety, and global capital flows.

Third is the trade deficit. The US has long imported more than it exports, which theoretically puts downward pressure on the dollar. But there’s a special aspect here: the dollar is simultaneously the world’s main reserve currency and an underlying asset for capital markets. Many countries take the dollars earned from exports and reinvest them back into US Treasuries and stocks. So actual exchange-rate performance can’t be judged solely by trade figures.

The fourth factor—often overlooked—is the US’s global influence and credit. The dollar’s ability to become a global settlement currency fundamentally comes from global trust in the US. But in recent years, the situation has been changing. The trend of de-dollarization is indeed real. The rise of the euro zone, renminbi crude oil futures, and cryptocurrencies are all challenging the dollar’s position. Since 2022, this trend has become more apparent, and many countries have started buying gold rather than US Treasuries.

That said, it’s important to emphasize that the dollar is still the world’s primary reserve currency—it's just shifted from the “one clear winner” situation of the past to a “the dollar plus multiple currencies coexist” pattern. This will bring long-term structural pressure on the dollar, but it won’t suddenly collapse in the short term.

Looking at history helps explain the dollar’s resilience. During the 2008 financial crisis, panic hit the market and capital flowed back into the dollar in large amounts, causing the dollar to surge in value. During the COVID-19 period in 2020, the US “splashed money” on a large scale and the dollar weakened temporarily, but after the economy stabilized, it rebounded strongly again. In the rate-hike cycle from 2022 to 2023, the US Dollar Index surged to a peak. Now that we’re entering a rate-cut cycle, the dollar’s interest-rate advantage is starting to shrink, shifting from one-sided strength to high-level consolidation.

Based on the current “slow, late, and small” rate path, together with long-term factors like geopolitics and de-dollarization, I believe that over the next year the dollar is more likely to experience high-level consolidation and a slightly weak, range-bound pattern rather than a one-way, big decline. But that doesn’t mean the dollar will keep falling all the way. As long as new financial risks or geopolitical conflicts emerge globally, capital may still flow back into the dollar, because fundamentally it remains the most important safe-haven currency.

At the same time, keep in mind that the US Dollar Index trend depends not only on the US itself, but also on the relative performance of the component currencies. If Europe cuts rates more slowly, while Japan and other economies adopt more accommodative policies, the dollar could maintain resilience due to relative interest-rate differentials. De-dollarization is indeed a long-term trend, but it’s a slow process measured in years—it won’t make the US Dollar Index drop from 100 directly to 90 within 12 months.

The dollar’s movement also has a major impact on different assets. A weaker dollar and falling real interest rates are usually 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 can encourage capital to flow into stock markets, especially technology and growth stocks. But if the dollar becomes too weak, foreign capital may shift toward Europe, Japan, or emerging markets. A weaker dollar typically has a positive effect on cryptocurrencies, because funds look for assets that can hedge against inflation—at such times, Bitcoin, as “digital gold,” draws particular attention.

Specific currency pairs are also interesting. Take USD/JPY: Japan has just ended its ultra-low interest rate policy, so capital returning could boost the yen, and in the future the USD/JPY rate may trend lower. As for the Taiwan dollar, Taiwan’s interest rates follow the US dollar, but domestic issues mean it can’t cut rates impulsively. In addition, since Taiwan’s economy is export-driven, a weaker dollar is favorable for exports. Therefore, during the US rate-cut cycle, the NT dollar is expected to appreciate, but not by a large amount. In the euro area, the exchange rate trend is currently relatively stronger than the dollar’s. However, Europe’s economic situation isn’t good—there is high inflation but weak economic strength. If the European Central Bank gradually cuts rates, the dollar may be slightly weaker, but not to a large extent.

If you want to capture trading opportunities from fluctuations in the dollar exchange rate, in the short term you should focus on data that affects interest-rate expectations—such as CPI, non-farm employment, and FOMC meetings—so you can go long or short to trade short-term volatility. If you don’t do intraday trading, you can use support and resistance levels of the US Dollar Index, combined with differences in central bank policies across countries, to look for swing opportunities over a period of a few weeks to a few months. For medium- and long-term investors, you can diversify dollar-exchange-rate risk by using gold, foreign exchange, and other assets. When the dollar is consolidating at high levels or moving into a weakening phase, these kinds of allocations are often more helpful for balancing your overall asset portfolio. The dollar’s strength isn’t just a topic in the news—it's something that directly affects our investment returns and asset allocation. Rather than passively waiting, it’s better to plan ahead and position yourself to follow the trend.