Recently, those paying attention to the dollar trend should have noticed that expectations for U.S. interest rate hikes are unpredictable, and the market’s judgment of the Federal Reserve is constantly adjusting. Honestly, this kind of uncertainty is exactly where trading opportunities lie.

I’ve observed an interesting phenomenon — the US dollar index has been fluctuating between 90 and 100 for nearly a year. Looking back, in 2022, the dollar index surged to a high of 114, then fell approximately 15%, with a nearly 9.5% decline for the entire last year, marking the largest annual drop since 2017. Recently, due to escalating geopolitical conflicts, the dollar has rebounded slightly on safe-haven buying, but the direction remains unclear.

To understand the future direction of the dollar, several core factors must be clarified. First is interest rate policy — this is the most direct driver of the dollar. When U.S. interest rates rise, capital flows in; when they fall, capital flows out. But the key is that the market reacts in advance to expectations, not waiting until policies are confirmed to act. Currently, the Fed’s hawkish stance is more data-driven: non-farm payrolls remain strong, and inflation remains sticky, making it unlikely to fall quickly. As a result, the market has repeatedly pushed back expectations for rate cuts. Some institutions even predict that rates could stay unchanged throughout 2026, with a policy shift not seen until 2027.

But there’s a detail worth noting — the Fed’s current stance doesn’t seem like the start of a new structural rate hike cycle, but rather a passive response to data. As long as employment, wages, and core inflation begin to slow in the coming quarters, there’s still a chance for a policy shift toward easing.

Besides interest rates, the supply of dollars is also very important. Quantitative easing (QE) increases liquidity and pushes down yields, while quantitative tightening (QT) does the opposite. But this doesn’t mean QE necessarily causes the dollar to depreciate, nor does QT necessarily cause it to appreciate — in reality, the exchange rate is the result of the combined effects of interest rate differentials, risk aversion demand, and global capital flows.

Another often overlooked factor is the U.S. trade deficit. The U.S. has long imported more than it exports, which from a textbook perspective should put downward pressure on the dollar. But the dollar is also the world’s primary reserve currency; many countries reinvest the dollars earned from exports into U.S. bonds and stocks, creating a unique combination of “trade deficit plus capital inflow.” That’s why looking at trade figures alone often doesn’t accurately predict exchange rate movements.

A deeper issue is the trend of de-dollarization. Since the U.S. abandoned the gold standard, interest rate adjustments have influenced global wealth, sparking a wave of de-dollarization. The eurozone’s formation, the rise of yuan crude oil futures, and the emergence of cryptocurrencies are all challenging dollar dominance. Especially since 2022, many countries have begun losing confidence in the dollar and U.S. debt, turning instead to gold. However, it’s important to emphasize that the dollar remains the world’s most important reserve currency; it has only evolved from being dominant to coexisting with multiple currencies. This will exert structural pressure on the dollar for a long time, but it won’t suddenly collapse within the next 12 months.

Historically, the dollar’s movements are often influenced by major economic events. During the 2008 financial crisis, market panic and massive capital flight to the dollar caused a sharp appreciation. During the COVID-19 pandemic in 2020, the U.S.’s massive money printing to rescue the economy temporarily weakened the dollar, but it rebounded strongly as the economy stabilized. In the rate hike cycle of 2022–2023, the dollar index surged again. As we enter the 2024–2025 rate cut cycle, the dollar’s interest rate advantage is shrinking, and the market is shifting from a one-sided strength to high-level oscillation. These historical patterns show one key principle: the dollar cannot be judged solely by rate hikes or cuts; policy, economy, and risk events must all be considered together.

Based on a “slow, late, and small” interest rate path, combined with geopolitical and long-term de-dollarization factors, I believe the dollar is more likely to fluctuate at high levels and weaken gradually over the next year, rather than sharply depreciate. But this doesn’t mean the dollar will decline all the way — as long as new financial risks, geopolitical conflicts, or market panic emerge globally, capital may flow back into the dollar, because it remains one of the world’s most important safe-haven currencies.

At the same time, pay attention to the relative performance of the components of the dollar index. If Europe slows its rate cuts or Japan and other major economies adopt more accommodative policies, the dollar could remain resilient due to relative interest rate differentials. De-dollarization is indeed a real long-term trend, but it is a slow process measured in years, and won’t cause the dollar index to drop from 100 to 90 within the next 12 months.

The dollar’s movements impact different assets in various ways. A weaker dollar and declining real interest rates are more favorable for gold, as gold priced in dollars becomes cheaper when the dollar depreciates. U.S. rate cuts tend to encourage capital inflows into stocks, especially 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, with Bitcoin as digital gold especially gaining attention during global economic turbulence.

Regarding major currency pairs: as Japan ends its ultra-low interest rate era, capital may flow back into the yen, likely causing USD/JPY to weaken. For the Taiwan dollar, Taiwan’s interest rates follow the U.S. dollar but with its own considerations; during a rate-cut cycle, the TWD is expected to appreciate modestly. The euro is currently relatively stronger than the dollar, but given Europe’s poor economic conditions, high inflation, and economic weakness, if the European Central Bank gradually cuts rates, the dollar may weaken slightly but not sharply.

To seize trading opportunities from dollar exchange rate fluctuations, in the short term, focus on data that influence rate expectations — CPI, non-farm payrolls, FOMC meetings, and dot plots — and trade around these announcements with long or short positions. If not engaging in 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- and long-term investors, diversifying with gold, foreign exchange, and other assets can help hedge against dollar volatility; when the dollar is at high levels or consolidating/weakening, such allocations are usually more effective in balancing the overall portfolio.