I've been pondering a question lately—should the US dollar appreciate or depreciate? This question is much more complex than it seems.

Let's start with the most basic concept. The exchange rate of the dollar is essentially the ratio of US dollars to other currencies. For example, EUR/USD; if this value rises, it indicates the euro is appreciating and the dollar is depreciating; conversely, it means the dollar is strengthening. And the US Dollar Index (DXY) combines the exchange rates of six major international currencies against the dollar, providing a more comprehensive reflection of the dollar's strength or weakness.

I’ve noticed an interesting phenomenon—the history of the dollar is essentially a cycle of fluctuations. Starting from the 1970s, after the collapse of the Bretton Woods system, the dollar has experienced repeated cycles of rise and fall. During the 1970s oil crisis, the dollar declined sharply; in the 1980s, under the Reagan era, aggressive interest rate hikes pushed the dollar to record highs. Then followed a long bear market until the internet era, when the US economy soared, and the dollar index once surged to 120 points.

But after these cyclical rises, declines always follow. After the 2008 financial crisis, the dollar fell to around 60, a low point; although it rebounded afterward, since the outbreak of the COVID-19 pandemic in 2020, the Federal Reserve has been printing money aggressively and cutting interest rates to zero, causing the dollar to remain under pressure. Even in 2022, when the Fed aggressively raised interest rates, which temporarily supported the dollar, this high-interest-rate policy also faced challenges—slowing economic growth and diminishing the dollar’s attractiveness.

Regarding the current market landscape, the logic of dollar appreciation is actually changing. On the surface, the Fed’s policy stance and the US economic performance should support the dollar, but in reality, the market is already digesting rate cut expectations. When economic data underperform, it actually fuels speculation about Fed rate cuts, which in turn weakens the dollar’s appeal.

Looking at major currency pairs, the situation varies. EUR/USD benefits from improved European Central Bank policies and dollar depreciation pressures, and may continue to rise. GBP/USD is similar, as the Bank of England’s cautious rate cut stance supports the pound. USD/JPY is particularly interesting—Japan’s economy is improving, wage growth has hit a 32-year high, and the Bank of Japan may face upward pressure on interest rates, which could weaken the yen and limit the dollar’s appreciation against the yen. As for USD/CNY, it mainly depends on the divergence of US and Chinese economic policies.

So, is now a good time to go long on the dollar? I think it depends on the timeframe. In the short term, if geopolitical risks escalate or US economic data exceeds expectations, the dollar could indeed rebound, offering some swing trading opportunities. But from a medium- to long-term perspective, the deepening of the Fed’s rate cut cycle and falling US Treasury yields will put downward pressure on the dollar. The momentum for dollar appreciation may be gradually waning.

More interestingly, the trend of de-dollarization worldwide is accelerating. More countries are promoting local currency settlement, which poses a long-term challenge to the dollar’s reserve currency status. So even if there’s a short-term rebound opportunity, the long-term risk-reward of holding dollar positions might be less attractive than shifting into other assets—such as non-dollar currencies in economies recovering, or safe-haven assets like gold and commodities.

The key is to stay flexible. The dollar’s movements are increasingly driven by specific economic data and policy events rather than simple trend continuation. Those who can respond more quickly to market changes will be better positioned to profit from exchange rate fluctuations.