The dollar's decline is hard to stop! The Federal Reserve's policy shift is boosting the euro's performance

The US Dollar Index recently signaled renewed pressure. On December 3rd, it quoted at 99.24, marking the ninth consecutive trading day of decline with a drop of 0.08%. Meanwhile, the Euro against the US Dollar (EUR/USD) has been on its eighth day of upward movement, with the latest quote reaching 1.1637, indicating a strong trend.

Historical Patterns Reveal Weak US Dollar in December

Reviewing data from the past 10 years, the US Dollar Index shows a clear seasonal decline in December. Statistics indicate that in the past 10 years, the dollar index has fallen in 8 Decembers, with a probability of decline reaching 80%, and an average drop of about 0.91%, making it the weakest month of the year. Based on this historical pattern, market participants generally expect the dollar to underperform this month.

Fed Rate Cut Expectations Ignite Dollar Bearish Sentiment

The fundamental reason for the dollar’s pressure points to the Federal Reserve’s policy outlook. According to real-time data from the CME FedWatch Tool, the market currently prices in an 89.2% probability of a 25 basis point rate cut by the Fed in December, with two more rate cut opportunities in 2026. This ongoing expectation of rate cuts directly diminishes the attractiveness of the dollar, leading to continued capital outflows and boosting the relative value of other currencies such as the euro.

Three Major Variables Will Determine the Dollar’s Future Trend

Several market analysts point out that whether the dollar’s decline continues hinges on two factors: first, the monetary policy direction of the Bank of Japan; second, the policy inclination of the new Federal Reserve Chair.

Latest news indicates that US President Trump may nominate Chief Economic Advisor Haskett as the new Fed Chair. Van Luu, Head of Global Forex at Russell Investments, commented that under Haskett’s leadership, the Fed might adopt a more dovish stance. This personnel change is expected to further weaken the dollar, with the EUR/USD potentially breaking through this year’s high of around 1.19, reaching a four-year high.

At the same time, market expectations for a rate hike by the Bank of Japan in December have risen to 80%, which would further widen the US-Japan interest rate differential. Steven Barrow, G10 Strategist at Standard Bank, pointed out that the combination of a rate hike by the Bank of Japan, a dovish tilt from the new Fed leadership, and potential trade policy headwinds will form a “triple strike” against the dollar.

The Dollar Still Has Downside Potential

Deutsche Bank macro strategist Tim Baker believes that the dollar index is likely to retreat toward the lows seen in the third quarter, implying about a 2% downside potential. This assessment provides market participants with a clear reference for trading.

Regardless of when these variables materialize, market consensus suggests that the dollar’s weakness cycle is about to deepen, and the euro’s upward trend may continue to ferment into the fourth quarter and even into early 2026.