Federal Reserve rate cuts influence capital flows, impacting the U.S. dollar (USD) in several ways. Lower interest rates reduce yields on U.S. assets, making them less attractive to foreign investors, which can lead to capital outflows and weaken the dollar. However, if rate cuts boost stock market confidence, capital inflows into equities may partially offset USD depreciation. Global risk sentiment also plays a role—if investors see U.S. assets as safe, the dollar could remain resilient despite lower rates. Additionally, rate cuts can encourage borrowing and spending, stimulating economic growth but potentially increasing inflation. If inflation rises faster than expected, it may erode the dollar’s purchasing power. The net effect on the USD depends on the balance between capital outflows from lower yields and inflows driven by risk appetite. A sustained dovish Fed policy often leads to a weaker dollar over time.