English Title: U.S. Dollar Cycle Risk Guide for FX Traders

Build a Forex Watchlist Using the U.S. Dollar Cycle

The U.S. dollar cycle is not a single price chart, but a macro framework shaped by interest rates, inflation, employment, risk appetite, and capital flows. Foreign exchange trading, orFX, presents price changes through currency pairs. Therefore, when analyzing the U.S. dollar, traders should not only ask whether the dollar will rise, but also against which currency it may rise and how that change may affect the portfolio.

In practice, the U.S. dollar cycle can be divided into three common stages: the interest-rate-upcycle support stage, the policy-expectation turning stage, and the liquidity-easing recovery stage. Different stages affect the U.S. dollar, gold, emerging markets, U.S. equities, and dollar-denominated debt in different ways. This framework is not intended to provide specific buy or sell advice, but to help readers identify sources of risk before placing trades, allocating assets, or hedging.

Step One: Confirm the Dollar Indicators to Monitor

1. Monitor the U.S. Dollar Index, namelyDXY, to assess the dollar’s overall movement against six major currencies.

2. Monitor major currency pairs such as EUR/USD, USD/JPY, and GBP/USD to break down euro, yen, and sterling-related factors.

3. Monitor U.S. 2-year and 10-year Treasury yields to evaluate how the market is pricing the interest rate path.

4. Monitor dollar-denominated commodities such as gold, crude oil, and copper to assess how dollar changes are transmitted into commodity pricing.

5. Monitor emerging market currencies and dollar bond spreads to assess external financing pressure.

How to Track Federal Reserve Policy and the Interest Rate Cycle

Federal Reserve policy is a key variable in the U.S. dollar cycle. The Consumer Price Index, namelyCPI, is used to monitor inflation; Nonfarm Payrolls, namelyNFP, is used to monitor the labor market. The Federal Open Market Committee, namelyFOMC, adjusts its policy stance based on inflation, employment, financial conditions, and the economic outlook.

In practice, three types of information should be distinguished: the interest rate level that has already been announced, the market’s expected future interest rate path, and changes in policymakers’ wording in statements and meeting minutes. The foreign exchange market often reflects expectations in advance, so the dollar may not necessarily move in the apparent direction after a policy announcement.

Policy Tracking Workflow

1. Record the date of the next FOMC meeting and confirm whether economic projections will also be released.

2. Track CPI, NFP, the Personal Consumption Expenditures Price Index, and retail sales data before the meeting.

3. Compare whether the market-implied interest rate path is consistent with the wording of the Federal Reserve statement.

4. Observe the U.S. 2-year Treasury yield, as it is usually more sensitive to policy expectations.

5. After the meeting, compare the synchronized reactions of DXY, EUR/USD, USD/JPY, and gold.

How to Assess the Impact of Dollar Strength or Weakness on Different Assets

A stronger or weaker U.S. dollar should not be understood simply as a one-directional signal. Its impact on different assets depends on the asset’s pricing currency, cash flow sources, financing structure, and investor risk appetite. Dollar-denominated commodities may be affected by exchange rate translation; emerging market assets may be affected by capital flows; and U.S. multinational companies may be affected by the translation of overseas revenue.

How to Set Risk Parameters for Dollar Exposure

Dollar exposure refers to the part of a portfolio affected by the U.S. dollar exchange rate, including dollar cash, dollar bonds, U.S. equities, dollar-denominated commodities, dollar liabilities, and FX positions. For non-dollar investors, dollar appreciation may increase the translated value of dollar assets, but it may also increase the cost of dollar liabilities. For dollar-based investors, returns on overseas assets are also affected by movements in foreign currencies against the dollar.

Risk parameters should not be fixed at a single uniform ratio. They should be set according to account currency, cash flow currency, investment horizon, leverage level, and maximum drawdown tolerance. A commonly used approach is to conduct scenario testing rather than relying only on a single forecast.

1. Calculate the proportion of dollar-denominated assets and liabilities in the portfolio.

2. Calculate how portfolio net value would change if the dollar appreciates by 3%, 5%, and 10%.

3. Calculate how portfolio net value would change if the dollar depreciates by 3%, 5%, and 10%.

4. Identify directional risk, such as a stronger dollar simultaneously weighing on commodities and emerging market assets.

5. Set rebalancing triggers, such as reassessing when dollar exposure deviates from the target range by more than 5 to 10 percentage points.

How to Use DCA and Rebalancing to Reduce Timing Pressure

Dollar Cost Averaging, namelyDCA, is a method of investing funds in batches, with the goal of reducing dependence on a single entry price. It does not guarantee lower losses or higher returns, but it can smooth entry costs and is suitable for observing volatile exchange rate cycles.

Rebalancing means adjusting a portfolio back from a deviated state to its preset structure. Suppose a portfolio is originally designed to maintain a certain risk ratio among dollar assets, non-dollar assets, and commodity assets. When a sharp rise in the dollar causes the share of dollar assets to increase significantly, rebalancing can be used to reduce single-currency concentration. When the dollar weakens significantly, dollar exposure can also be reassessed according to risk objectives.

• DCA is suitable for reducing dependence on a single entry price, but it cannot replace asset fundamental analysis.

• Rebalancing is suitable for managing deviation risk, but excessive frequency can increase trading costs and tax complexity.

• Currency hedging is suitable for reducing currency volatility, but forward points, interest rate differentials, and margin costs need to be included in the calculation.

• Cash management is suitable for dealing with short-term uncertainty, but an excessively high long-term cash allocation may reduce portfolio efficiency.

Dollar Risk Checks Before Major Events

The U.S. dollar often experiences volatility before and after major macro events, including FOMC meetings, CPI releases, NFP releases, fiscal budget discussions, geopolitical conflicts, and global liquidity stress events. Risk checks before events are not meant to predict the outcome, but to confirm whether the account and portfolio can still withstand different outcomes.

Example Workflow Under the U.S. Dollar Cycle

The following workflow is suitable for FX monitoring, cross-asset allocation review, and risk records. It does not constitute specific trading advice. Its focus is to break the U.S. dollar cycle into checkable items and avoid relying only on a single chart or short-term price fluctuations.

1. Record the current DXY level and the trend direction over the past 20, 60, and 120 trading days.

2. Compare EUR/USD, USD/JPY, and GBP/USD to determine whether dollar strength or weakness is consistent.

3. Record changes in U.S. 2-year and 10-year Treasury yields, distinguishing policy expectations from growth expectations.

4. Check the latest changes in CPI, NFP, and GDP to assess whether economic data supports current interest rate expectations.

5. Observe gold, crude oil, and emerging market currencies to determine whether dollar changes are being transmitted across assets.

6. Calculate the proportions of dollar assets, dollar liabilities, and non-dollar assets in the portfolio.

7. Conduct 3%, 5%, and 10% dollar appreciation and depreciation scenario tests.

8. Decide whether rebalancing, leverage reduction, or hedge ratio adjustments are needed based on the preset risk range.

Incorporating the U.S. Dollar Cycle into Long-Term Risk Management

The value of the U.S. dollar cycle lies in providing a macro coordinate system. It cannot directly replace research on specific instruments, nor can it guarantee the performance of any asset, but it can help investors understand the connections among interest rates, inflation, exchange rates, and capital flows. For forex traders, the dollar cycle helps identify common drivers of major currency pairs. For cross-asset investors, it helps identify currency concentration and external financing risk within a portfolio.

A more robust approach is to incorporate the U.S. dollar cycle into regular reviews. Checking dollar exposure, exchange rate sensitivity, asset correlations, and major event risks monthly or quarterly can reduce the bias caused by ad hoc decisions. The dollar is not a tool for judging a single direction, but an important window into global funding costs and risk appetite.

Questions About the U.S. Dollar Exchange Rate Cycle