The U.S. dollar is coming off its best year in two decades, pushed up more than 12% by the Federal Reserve’s consecutive—and aggressive—interest-rate hikes to try to tame stubborn inflation.

The dollar started to cool in the final quarter of 2023 as the Federal Reserve hammered rising inflation with interest rate increases. So far in 2023, inflation and interest rate expectations have whipsawed back and forth. The dollar has responded largely in kind. In early March, the dollar hit its highest level since November, before investors’ concerns over stability of the U.S. banks triggered a sharp reversal. With the U.S. economic outlook for 2023 uncertain, the path forward for the U.S. dollar could have significant implications for inflation, international trade, technology stocks and fiat currency alternatives such as gold and cryptocurrencies.

In most of the major currency pairings, the U.S. dollar gained strength over the past 12 months. The strength of the dollar will continue to be tied closely to U.S. inflation and interest rates. If the Fed raises interest rates while other central banks maintain or even lower their interest rates, then the return on savings is more attractive in the U.S. than in other countries. Given this higher rate in the U.S., international capital should flow from other countries to the U.S., resulting in the dollar’s appreciation.