Lately, I’ve been thinking about a question: why do people all turn bullish on the U.S. dollar when interest rates are being raised, but when rates are cut, it doesn’t necessarily fall? The logic behind this is actually far more complex than most people think.

Simply put, the U.S. dollar exchange rate isn’t driven by plain “rate hikes vs. rate cuts.” It’s driven by the relative differences in monetary policy across countries. When the U.S. cuts rates, but Europe cuts more slowly, or when Japan is still easing, the dollar can actually strengthen on a relative basis. That’s why the U.S. Dollar Index fell 9.5% in 2025—its largest annual decline since 2017—but it’s now instead trading in a range between 90 and 100, without continuing to drop sharply.

I’ve noticed an important shift. In the past, the market expected the U.S. to ease quickly; now, the general consensus has moved toward a rate-cut path that is “slow, late, and less.” Non-farm payrolls data has continued to come in on the strong side, and inflation still can’t be brought down. This makes the Fed’s hawkish stance look like it could persist longer. Some institutions even believe that throughout 2026, rates may stay unchanged, with a possible pivot only in 2027.

But here’s the key point— the Fed’s current attitude is data-driven, not the start of a new structural rate-hike cycle. As long as, over the next few quarters, employment, wages, and core inflation begin to cool, the policy stance still has a chance to shift toward easing.

From the perspective of forecasting the dollar’s trend, I believe the coming year is more likely to be a pattern of high-level range trading and a slightly weak consolidation, rather than a one-way, large drop. You also have to factor in geopolitical risk and the long-term backdrop of de-dollarization. As long as global financial risk emerges or the market turns panicky, capital will still flow back into the dollar, because in essence it remains the most important safe-haven currency.

It’s also worth paying attention to the impact on different assets. A weaker dollar is beneficial for gold, because gold is priced in U.S. dollars—when the dollar depreciates, gold effectively becomes cheaper. U.S. rate cuts tend to encourage capital to flow into equities, especially technology stocks. Cryptocurrencies also usually benefit when the dollar weakens, because funds look for assets that can help hedge against inflation.

When it comes to currency pairs, USD/JPY is a key focus. With Japan ending its ultra-low interest-rate policy, money could flow back into the yen, making it quite likely that the yen appreciates and the dollar/yen moves lower. As for the TWD, it’s expected to appreciate during a U.S. rate-cut cycle, but the increase wouldn’t be very large. For EUR/USD, the euro is currently relatively strong, but Europe’s economic conditions are not ideal; if the central bank gradually cuts rates, the dollar may weaken somewhat, but not to a significant extent.

If you want to capture trading opportunities brought by dollar trend forecasts, in the short term, pay attention to data such as CPI, non-farm payrolls, and the FOMC meetings—these can affect rate expectation dynamics, so you can take advantage of volatility to go long or short. For the medium to long term, you can use the dollar index’s support and resistance levels, together with differences in central bank policies across countries, to look for swing opportunities over a few weeks to a few months. Or, you can simply diversify dollar-weakness and dollar-strength risk by allocating across gold, forex, and other assets. When the dollar is trading in a high-level range or in a weakening phase, these types of allocations typically help balance the overall portfolio more effectively.

In plain terms, rather than passively waiting for exchange rates to rise and fall, it’s better to understand these dynamics early and position accordingly. The dollar’s strength or weakness directly affects investment returns and asset allocation, so it’s something that deserves serious attention.