Recently, I’ve been pondering a question: Why is the US dollar exchange rate so important? After reviewing 50 years of historical dollar exchange rate data, I realized there are many stories hidden behind the dollar’s rises and falls.

In September 2024, the Federal Reserve began cutting interest rates. Many people thought the dollar would weaken directly. But in reality, it’s much more complicated. Lowering rates does narrow the interest rate differential advantage of the dollar, but the exchange rate is also influenced by global risk sentiment, other central bank policies, and safe-haven demand. So, the dollar may not necessarily weaken in a single direction; instead, it could enter a high-level oscillation pattern.

I noticed an interesting phenomenon: the dollar exchange rate cannot be judged simply by raising or lowering interest rates. For example, during the 2008 financial crisis, market panic and massive capital flight to the dollar caused the dollar to appreciate sharply. During the COVID-19 pandemic in 2020, the US printed money to rescue the economy, causing the dollar to temporarily weaken, but then it rebounded strongly due to economic stabilization. These historical events tell us that policy, economic conditions, and risk events must be viewed together to understand the dollar’s trend.

Returning to the present, the non-farm payroll data in Q2 2026 remains strong, and inflation remains sticky. Market expectations for the Federal Reserve have shifted from rapid easing to a “slow, late, small” rate cut path. Some institutions even believe rates may stay unchanged throughout this year, with a policy shift not until 2027. But this hawkish stance seems more data-driven rather than the start of a new rate hike cycle. As long as employment, wages, and core inflation begin to slow, policy stance could return to neutral or even easing.

Looking at the long-term trend of the dollar index over 50 years, after peaking around 114 in 2022, it has declined about 15%. Recently, due to escalating geopolitical conflicts, the dollar has rebounded slightly on safe-haven buying. Currently, the dollar index oscillates between 90 and 100, approaching a year of stalemate.

I’ve summarized several key factors influencing the dollar. First is interest rate policy: high rates attract capital, increasing the dollar’s appeal; low rates may lead funds elsewhere. Second is the dollar supply: QE and QT change liquidity, but this doesn’t necessarily mean QE always weakens the dollar or QT always strengthens it. Then there’s the trade deficit: the US has long imported more than it exports, which from a textbook perspective should pressure the dollar downward, but the US is also the world’s primary reserve currency. Many countries reinvest their dollar earnings into US bonds and stocks, creating a unique capital cycle.

The last factor is the US’s global influence. The dollar’s status as the main global settlement currency stems from international trust in the US. But this position is now challenged. Since abandoning the gold standard, de-dollarization has become more evident. The eurozone, the rise of the yuan, crude oil futures, and cryptocurrencies are all challenging dollar hegemony. Especially since 2022, many countries have lost confidence in the dollar and US Treasuries, turning to gold instead. However, it’s important to emphasize that the dollar remains the world’s primary reserve currency. Currently, it’s more of a “dollar plus multiple currencies” coexistence pattern, which puts structural pressure on the dollar but doesn’t cause it to collapse suddenly in the short term.

Based on this “slow, late, small” interest rate path, combined with geopolitical and de-dollarization long-term factors, the dollar is more likely to show high-level oscillation and slight weakening over the next year rather than a sharp decline. But this doesn’t mean the dollar will keep falling. If new financial risks, geopolitical conflicts, or market panic emerge globally, capital may flow back into the dollar, as it remains one of the most important safe-haven currencies worldwide.

Dollar exchange rate fluctuations have a significant impact on various assets. When the dollar weakens, gold becomes cheaper, boosting demand. US rate cuts can stimulate capital inflows into stocks, especially tech and growth stocks. In cryptocurrencies, a weaker dollar means reduced purchasing power, usually positively impacting the crypto market as funds seek assets to hedge inflation. Bitcoin, as digital gold, is often seen as a store of value during global economic turmoil, dollar depreciation, or rising inflation.

For different currency pairs, several are worth noting. Regarding the yen, Japan ending ultra-low interest rates could lead to capital returning, pushing the yen higher, with USD/JPY potentially weakening. The Taiwan dollar is expected to appreciate in a US rate-cut cycle, but the magnitude won’t be large, as Taiwan faces domestic issues—like the housing market—making rate cuts risky, and as an export-driven economy, a lower exchange rate benefits exports. The euro is relatively stronger than the dollar, but European economic conditions are weak, with high inflation and sluggish growth. If the European Central Bank gradually cuts rates, the dollar may weaken slightly but not sharply.

If you want to use dollar exchange rate fluctuations for investment, short-term movements can be influenced by every small event. It’s important to monitor CPI, non-farm payrolls, FOMC meetings, and dot plots—these impact rate expectations. If you’re not trading intraday, you can use support and resistance levels of the dollar index, combined with policy differences between the US and major central banks, to identify swing opportunities over weeks or months. For medium- to long-term investors, diversifying with gold, foreign exchange, and other assets can help hedge dollar volatility. When the dollar is oscillating at high levels or weakening, such allocations are usually more effective in balancing the overall portfolio.