Recently, I have been pondering a question: why is the US dollar experiencing a sharp decline? The seemingly simple logic of rate cuts is actually much more complex behind the scenes.

Since the beginning of this year, the US dollar index has fallen significantly from its high points, but the reasons behind this are not just expectations of US rate cuts. I have noticed that at least four factors are simultaneously influencing the dollar's movement.

First is monetary policy. This is the most direct driving force. When the US cuts interest rates, the attractiveness of the dollar indeed diminishes, and capital flows into other high-yield markets. But here’s a key point: the market reacts in advance. The dollar does not start falling only after rate cuts actually happen; it begins to adjust the moment rate cut expectations form. So, this year's dollar weakening is better explained not by rate cuts themselves, but by the market’s re-pricing of those expectations.

Second is changes in the supply of dollars. Quantitative easing and tightening do affect liquidity, but they are not directly equivalent to dollar appreciation or depreciation. The exchange rate of the dollar is often the result of the combined effects of interest rate differentials, risk aversion demand, and global capital flows. When all three factors change simultaneously, the dollar will show noticeable rises or falls.

The third factor is the trade deficit. The US has maintained a large trade deficit for a long time, which theoretically should exert downward pressure on the dollar. But the reality is more complicated because the US is also the world’s largest capital market. Many countries and institutions reinvest the dollars earned from exports into US bonds and stocks, creating a special balance. Therefore, looking solely at trade figures often does not reveal the true driving forces behind dollar movements.

The last factor is the US’s global influence. This is the deepest reason. The dollar’s status as the world’s primary settlement currency stems from global trust in the US. But in recent years, the trend of de-dollarization has accelerated. The euro’s establishment, the rise of yuan crude oil futures, the emergence of cryptocurrencies, and since 2022, many countries shifting toward buying gold instead of US Treasuries—all challenge the dollar’s hegemony. This is one of the most structural reasons behind the dollar’s sharp decline.

I observe that the dollar now more often presents a pattern of “dollar plus multiple currencies coexisting,” rather than the previous dominance. This will exert structural pressure on the dollar for a long time.

Looking back over the past 50 years, the dollar’s exchange rate has often been affected by major economic events. During the 2008 financial crisis, panic led to a massive capital flight into the dollar, causing a sharp appreciation. During the COVID-19 pandemic in 2020, the US’s massive money printing to rescue the economy temporarily weakened the dollar, but it rebounded strongly as the US economy stabilized. The rate hike cycle from 2022 to 2023 pushed the dollar index to new highs. As we enter the rate cut cycle of 2024 to 2025, the dollar’s interest rate advantage is shrinking, and the market is gradually shifting from a one-sided strength to high-level oscillation.

Now, considering the situation in 2026, non-farm payroll data remains strong, and inflation remains sticky. This has repeatedly delayed market expectations for rate cuts. The current market view has shifted from expecting rapid easing to a “slow, late, and small” rate cut path. Some institutions even believe that rates may remain unchanged throughout 2026, with a policy shift possibly not occurring until 2027.

But here’s a key point: the Fed’s current hawkish stance is more data-driven than the start of a new structural rate hike cycle. As long as employment, wages, and core inflation begin to slow in the coming quarters, there is still a chance for policy to return to neutral or even easing.

Based on this “slow, late, and small” rate path, combined with long-term geopolitical and de-dollarization factors, my judgment is that the dollar is more likely to experience high-level oscillation and a slight weakening over the next year, rather than a one-way sharp decline. However, this does not mean the dollar will keep falling indefinitely. Whenever 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.

At the same time, it’s important to note that the dollar index’s movement depends not only on the US itself but also on the relative performance of its component currencies. If Europe cuts rates more slowly or Japan and other major economies adopt more accommodative policies, the dollar could remain resilient due to interest rate differentials.

De-dollarization is indeed a real long-term trend, but it is a slow process measured in “years,” not something that will cause the dollar index to drop from 100 to 90 within the next 12 months. Central banks’ actions to reduce holdings of US Treasuries and increase gold reserves are happening, but the dollar’s core position in global reserves and settlement systems remains difficult to replace in the short term.

The strength or weakness of the dollar also impacts different assets. Gold usually has an inverse relationship with the dollar, so a weaker dollar tends to favor gold. Rate cuts in the US can stimulate capital inflows into equities, but if the dollar becomes too weak, foreign investors might shift to other markets. Cryptocurrencies tend to benefit from dollar weakness, as capital searches for assets to hedge inflation.

Regarding the relationship between the dollar and other major currencies: as Japan ends its ultra-low interest rate policy, capital flows may push the yen higher, and the USD/JPY exchange rate could weaken. The Taiwanese dollar is expected to appreciate but not by much. The euro’s exchange rate is relatively stronger than the dollar, but Europe’s economy itself is not very strong—high inflation but weak growth.

The dollar’s fluctuations are not just an international financial news topic; they directly influence our investment returns, asset allocation, and even retirement planning. Instead of passively waiting for exchange rates to fluctuate, it’s better to proactively position oneself and follow the trend. In the short term, focus on CPI, non-farm payrolls, FOMC meetings, and dot plots—these data points influence rate expectations. If you’re not doing intraday trading, you can use support and resistance levels of the dollar index, along 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 into gold, foreign exchange, and other assets can help hedge against dollar volatility. When the dollar is oscillating at high levels or weakening, such allocations are usually more effective in balancing the overall portfolio.