USD Exchange Rate Trend Forecast: Investment Guide During the 2026 Rate Cut Cycle

By the end of 2024, the Federal Reserve will open the door to interest rate cuts, and the global financial markets will enter a new cycle. For investors, the outlook for the US dollar exchange rate is no longer just a macroeconomic issue but a practical matter that directly impacts asset allocation. As the world’s primary settlement currency, changes in US interest rate policies will influence the entire financial system—capital flows shift, trading opportunities emerge, and risks also evolve. So, during this rate-cutting cycle, will the US dollar appreciate or depreciate? And what investment opportunities are worth seizing?

Why Does the US Dollar Appreciate or Depreciate? Core Drivers Analysis

The first step in predicting the US dollar exchange rate is understanding the internal logic behind dollar appreciation and depreciation. On the surface, the exchange rate is simply the ratio between two currencies—for example, EUR/USD=1.04, meaning 1 euro requires 1.04 dollars to exchange. But what drives this number to change is far more than just currency conversion.

Interest rates are the most direct indicator of the dollar’s attractiveness. When US interest rates are high, capital is attracted by the high returns on dollar assets, leading to large inflows into the dollar market and pushing the dollar higher. Conversely, when the US begins to cut rates, the dollar’s relative appeal diminishes, and funds tend to flow into other high-yield markets—stocks, gold, cryptocurrencies, and other risk assets.

However, there is a key investment trap: the impact of rate cut announcements and expectations has a time lag. Markets are efficient; they don’t wait until the Fed officially cuts rates to start adjusting the dollar. Instead, they begin trading based on expectations the moment they form. Therefore, investors should focus not on the current rate policy but on the future rate cut expectations curve—usually indicated by the Fed’s dot plot. According to the latest policy guidance, the goal is to bring US interest rates down to around 3% before 2026.

Besides interest rates, the supply of US dollars is also crucial. Quantitative easing (QE) increases market liquidity and dilutes the dollar’s value; quantitative tightening (QT) reduces dollar supply and may strengthen the dollar. Investors need to closely monitor the Fed’s monetary policy direction, not just headline rate changes.

What 50 Years of History Tells Us—Cycle Patterns of the Dollar Exchange Rate

To accurately forecast the dollar’s movement, it’s essential to review historical cycles. Since the collapse of the Bretton Woods system in the 1970s, the US dollar index (a measure of the dollar’s strength against major currencies) has gone through eight significant phases.

During the 2008 financial crisis, panic capital flooded back into the dollar, causing the dollar index to soar. When markets face crises, the dollar’s role as a safe haven becomes prominent—regardless of how bad the US economy is, global investors’ first response is to buy dollars.

In the COVID-19 pandemic in 2020, the US government’s massive stimulus temporarily weakened the dollar, but as the economy recovered, the dollar rebounded quickly. This shows that ultimately, the dollar’s trend is determined by US economic fundamentals.

From 2022 to 2023, aggressive rate hikes by the Fed pushed the dollar to its strongest in two decades, with the dollar index surpassing 114 at one point. This was the most glorious moment for the dollar in the past 20 years but also planted the seeds for a rate-cutting cycle.

These historical events reveal a pattern: Dollar appreciation usually coincides with the strengthening of the US’s relative advantage—higher interest rates, stronger economic growth, or global risk events. Conversely, dollar depreciation occurs when this advantage weakens—interest rates fall, economic momentum slows, or global risk sentiment improves.

What Will Happen to the Dollar in 2026? Multi-Dimensional Analysis

Looking into 2026, predicting the dollar’s trend requires considering more complex geopolitical and economic factors.

Negative factors are accumulating. Trade war escalation is a key variable—America is no longer just confronting China but preparing for tariff wars globally. This could directly reduce international trade settled in dollars, negatively impacting dollar demand. Meanwhile, the “de-dollarization” wave continues to accelerate, with countries’ central banks buying gold and promoting local currency settlements, exerting long-term pressure on the dollar.

But risk aversion remains. Geopolitical risks frequently erupt—ongoing Russia-Ukraine conflict, complex Middle East situations, sensitive Taiwan issues. Whenever a new crisis emerges somewhere globally, capital tends to rush back into the dollar because it remains the most reliable safe-haven asset.

A key focus is the pace of rate cuts by central banks worldwide. The dollar’s exchange rate depends not only on US policy but also on the movements of other major currencies’ components—Euro, Yen, Pound, etc. If the European Central Bank (ECB) cuts rates faster than the Fed, the euro may appreciate, and the dollar could weaken relative to the euro. Japan’s recent end to its ultra-low interest rate era may lead to yen capital returning to Japan, strengthening the yen and weakening USD/JPY.

Overall, the most likely scenario for the next year is “high-level oscillation followed by gradual weakening” of the dollar index, rather than a sharp decline. Short-term fluctuations driven by economic data, geopolitical events, and central bank statements will create trading opportunities. But the long-term trend, influenced by de-dollarization and diminishing relative interest rate advantages, suggests the dollar will not replicate the strength seen in 2022–2023.

Major Currency Pair Forecasts: USD/JPY, EUR/USD, TWD/USD

Relying solely on the dollar index for forecasts is too broad; investors should focus on specific currency pairs relevant to their asset allocation.

USD/JPY (US dollar vs. Japanese Yen): Japan has ended decades of ultra-low interest rates, and the Bank of Japan (BOJ) is normalizing policy. Capital flows back to Japan are increasing, and the yen is expected to gradually appreciate. USD/JPY may face depreciation pressure. Historically, yen appreciation occurs during rising global risk or when Japan’s economy outperforms others—both conditions are present now.

EUR/USD (Euro vs. US dollar): The ECB is currently more aggressive in rate cuts than the Fed, giving the euro some upward potential. However, Europe faces high inflation and sluggish growth, limiting the euro’s appreciation. Expect EUR/USD to trend mildly higher but not break major resistance.

TWD/USD (Taiwan dollar vs. US dollar): Taiwan’s interest rate policy follows the dollar, but domestic factors—such as the desire to control housing prices—limit aggressive rate cuts. As an export-driven economy, a relatively weaker TWD benefits competitiveness. Expect the Taiwan dollar to appreciate modestly during rate-cut cycles, but gains will be limited.

How Dollar Movements Affect Gold, Stocks, and Cryptocurrencies

Dollar fluctuations ripple across asset classes.

Gold is the most direct inverse asset to the dollar. Gold priced in dollars rises when the dollar weakens, as the cost in other currencies drops. Rate cuts reduce the opportunity cost of holding gold (which pays no interest), making gold more attractive. Therefore, during this rate-cut cycle, gold is likely to continue rising.

US stocks face dual influences. Lower rates tend to boost stock markets, especially tech and growth stocks, as capital searches for higher returns. But if the dollar depreciates excessively, foreign investors might shift funds elsewhere—Europe, Japan, or emerging markets—reducing inflows into US equities. Investors should be cautious about overly bullish views on US stocks.

Cryptocurrencies often perform well when the dollar weakens. A declining dollar erodes purchasing power, prompting investors to seek assets that hedge inflation. Bitcoin, dubbed “digital gold,” is viewed as a store of value during economic turbulence and dollar devaluation. Historically, periods of sharp dollar decline have attracted significant crypto inflows as a safe haven.

Practical Trading Strategies to Capture Dollar Fluctuations

Understanding the logic behind dollar trend forecasts, how should investors operate?

Short-term trading to capture volatility. Before CPI, employment data releases, or geopolitical shocks, the dollar index often swings sharply. Traders can position based on data expectations—weak data may weaken the dollar; strong data may strengthen it. Geopolitical news can also trigger rapid moves, offering tactical trading opportunities.

Medium-term trend following. Based on the “high-level oscillation then weakening” outlook, investors can adopt a cautious short-to-medium-term bearish stance on the dollar, with risk management—setting stop-losses and scaling into positions. Simultaneously, allocate assets like gold and cryptocurrencies that benefit from dollar weakness to build hedging portfolios.

Long-term strategic positioning. The de-dollarization trend is a long-term force, but the dollar’s safe-haven status remains resilient in the short term. Investors should remain flexible tactically but recognize the dollar’s enduring role as a safe-haven asset—never short the dollar as a hedge.

Remember this key insight: whenever uncertainty exists, investment opportunities arise. When geopolitical risks rise, capital flows into the dollar; when economic data improves, the dollar may weaken; when central banks shift policies, exchange rates reprice. The true value of dollar trend forecasting lies not in predicting exact prices but in judging direction early and capturing opportunities amid volatility.