Is the outlook for the US dollar's appreciation uncertain? Trading opportunities amid exchange rate fluctuations in 2025-2026

The role of the US dollar in the international monetary system is crucial, and its appreciation or depreciation will directly impact global capital flows and commodity prices. As we approach 2026, the outlook for dollar appreciation becomes more complex—facing pressure from central bank rate cuts but potentially supported by geopolitical risks. To understand this contradictory phenomenon, we need to start by analyzing the fundamental mechanisms behind the dollar exchange rate.

Factors Determining Dollar Strength: The Triangle of Index, Exchange Rate, and Central Bank Policies

The core meaning of the dollar exchange rate is the value of a foreign currency relative to the US dollar. For example, EUR/USD represents how many US dollars one euro can buy. When EUR/USD rises from 1.04 to 1.09, it indicates that more dollars are needed to buy one euro, meaning the euro is appreciating and the dollar is depreciating; the opposite indicates dollar appreciation and euro depreciation.

The US Dollar Index (DXY) is a comprehensive measure of the dollar’s overall strength, weighted against six major currencies (euro, yen, pound, Canadian dollar, Swedish krona, Swiss franc). Fluctuations in DXY directly reflect the dollar’s relative movement against these currencies.

However, changes in DXY do not always align with the Federal Reserve’s policy direction. When the US cuts interest rates, the dollar should theoretically weaken, but if the European Central Bank cuts rates more aggressively, the dollar may actually strengthen relative to the euro. Therefore, analyzing whether the dollar appreciates or depreciates depends on comparing the monetary policies of the US and other economies.

The Eight Cycles of Dollar Evolution: From Bretton Woods to Today

Since the collapse of the Bretton Woods system in 1971, the dollar has experienced eight complete cycles of appreciation and depreciation, each reflecting the prevailing economic landscape and policy environment.

First phase: Slipping (1971–1980) After Nixon announced the end of the gold standard, gold and the dollar floated freely, leading to dollar depreciation. The subsequent oil crisis and high inflation drove the dollar index down below 90, hitting lows at the time.

Second phase: Strong Recovery (1980–1985) Federal Reserve Chair Paul Volcker implemented aggressive rate hikes, pushing the federal funds rate to a historic high (20%), then maintaining it at 8-10%. This successfully tamed inflation, and the dollar index rose to a record high in 1985.

Third phase: Long Bear Market (1985–1995) US fiscal and trade deficits widened simultaneously, creating a “double deficit” scenario. The dollar entered a prolonged downtrend, with exchange rates under pressure.

Fourth phase: Internet Boom Rebound (1995–2002) Under Clinton’s leadership, the US entered the tech revolution, boosting economic growth and attracting large inflows of international capital, pushing the dollar index above 120.

Fifth phase: Financial Crisis Shock (2002–2010) After the dot-com bubble burst, the dollar weakened amid 9/11 and prolonged quantitative easing policies, culminating in the 2008 global financial crisis. The dollar index briefly fell to around 60, a historic low.

Sixth phase: Safe-Haven Recovery (2011–2020 early) European debt crisis and China’s stock market crash prompted investors to flock back to the US for safety. The Fed signaled multiple rate hikes, and the dollar index strengthened significantly.

Seventh phase: Pandemic Shock (2020 early–2022 early) During COVID-19, the Fed cut rates to zero and launched unlimited QE. Massive money printing led to runaway inflation, causing the dollar index to decline and risking stagflation globally.

Eighth phase: Aggressive Adjustment (2022 early–2024 end) Facing out-of-control inflation, the Fed launched its most aggressive rate hike cycle in 25 years, along with quantitative tightening (QT). While inflation was curbed, the dollar’s credit foundation was challenged—high rates attracted capital but also risked triggering recession.

Drivers and Barriers to Dollar Appreciation: Key Variables for 2026

By 2026, the dollar’s outlook is at a critical crossroads. Potential drivers of dollar appreciation mainly include:

Rising geopolitical risks: Tensions like Taiwan Strait conflicts increase safe-haven demand, boosting the dollar. History shows that during global risk surges, the dollar, as the world’s primary reserve currency, often becomes the preferred refuge.

Strong economic data: If US employment and growth figures remain robust, markets may delay rate cuts, supporting the dollar’s strength.

Easing policies from other economies: If the European or Japanese central banks cut rates more than the Fed, the dollar will tend to appreciate relative to those currencies.

Conversely, barriers to dollar appreciation include:

Deepening rate cut cycles: Continued Fed rate cuts in 2026 would lower US Treasury yields, reducing the dollar’s yield advantage.

Accelerated de-dollarization: BRICS and other nations promoting local currency settlements could marginally weaken the dollar’s reserve currency status.

US debt issues worsening: If US debt auctions falter or credit ratings are downgraded, confidence in the dollar could decline.

Major Currency Pair Predictions: Mechanisms and Barriers to Dollar Appreciation

EUR/USD: Bearish on dollar appreciation

EUR/USD is highly inversely correlated with the dollar index. Currently trading around 1.08–1.09, if the European Central Bank remains cautious while the Fed accelerates rate cuts, the euro could appreciate, pushing EUR/USD higher—implying dollar weakness. Only significant US economic improvement or geopolitical shocks could reverse this trend.

GBP/USD: Relative resilience of the pound

The Bank of England is expected to cut rates more slowly than the Fed, providing relative support for the pound. In 2026, GBP/USD may hover between 1.25 and 1.35, with potential to challenge 1.40 if economic and policy divergence widens. However, political uncertainties and market liquidity risks should be watched.

USD/CNH: Limited upside pressure

USD/CNH is influenced by US-China policy differences. While Fed rate cuts could push USD higher, Chinese interventions often stabilize the exchange rate. Technically, USD/CNH tests 7.23–7.26 repeatedly, with difficulty breaking through, reflecting market hesitation about dollar appreciation.

USD/JPY: Downward pressure evident

Accelerating wage growth in Japan (up 3.1% YoY, the highest in 32 years) gives the Bank of Japan room to tighten. Expect USD/JPY to trend downward in 2026; a break below 146.90 could signal further declines. This indicates dollar appreciation faces resistance in the yen market.

AUD/USD: Australian dollar’s resilience

Australia’s solid economic fundamentals (higher-than-expected GDP growth, record trade surpluses) and cautious RBA rate cuts support the AUD. Fed easing policies lowering US yields favor a rebound in AUD/USD. Dollar appreciation thus faces headwinds in the Australian market.

2026 Dollar Trading Strategies: Profiting Amid Volatility

Given the above analysis, the dollar’s appreciation outlook is not optimistic and faces multiple pressures. Traders should adjust strategies accordingly.

Short-term (next 2–3 months): Range trading

Aggressive traders can leverage technical signals: buy low and sell high around support levels (e.g., 95–100 in the dollar index), using MACD and Fibonacci retracements to catch reversals. Positive US employment surprises or geopolitical escalations could trigger rebounds, creating entry opportunities.

Conservative traders should wait for clearer Fed signals before acting.

Medium to long-term (beyond 6 months): Gradually shift to non-dollar assets

As the Fed’s rate cut cycle deepens, dollar fundamentals weaken. Wise investors might consider:

• Reducing dollar long positions gradually
• Increasing holdings in yen, Australian dollar, and commodities (gold, copper), which tend to perform better when the dollar weakens
• Monitoring Eurozone recovery and emerging markets

Risk management and discipline

Dollar trading in 2026 will increasingly depend on data and event sensitivity. Market sentiment swings can be extreme. Successful strategies require strict stop-loss discipline and keen macroeconomic awareness. Avoid chasing short-term volatility at the expense of long-term trends. While opportunities for dollar appreciation exist, the probability is not high; investors should prepare for a potential long-term dollar decline.