The US dollar is caught in a recessionary vicious cycle, while the euro hits a nearly four-year high. Is there still a 2% decline space in December?

The foreign exchange market has been calm recently, but undercurrents are surging. The US Dollar Index has fallen for nine consecutive days, dropping to 99.24, while the euro against the dollar continues to rise to 1.1637. Behind these fluctuations, multiple market logic collisions are hidden.

Fed Rate Cut Expectations Continue to Rise, Dollar Under Pressure

CME FedWatch tool data shows that market expectations for the Federal Reserve to cut interest rates by 25 basis points in December have risen to 89.2%, with two more rate cuts expected in 2026. This expectation gap is continuously pushing the dollar lower. Investors generally believe that a rate-cut cycle means decreased attractiveness of the dollar, boosting capital flows into other high-yield currencies.

Meanwhile, the Bank of Japan’s probability of raising interest rates has climbed to 80%, creating a “weak USD, strong JPY” contrast. This divergence in central bank policies is a core driver behind the euro’s upward movement and the dollar’s decline.

Historical Pattern Suggests December as the “Decline Month” for the Dollar

Data does not lie. Over the past ten years, the USD Index has fallen in December in 80% of the years, with an average decline of about 0.91%, making it the worst-performing month of the year. Will this historical pattern repeat again this year?

Deutsche Bank macro strategist Tim Baker provides an answer — the dollar index is expected to revisit the lows near the third quarter, implying another 2% downside potential. In other words, during the remaining time in December, this downward probability is still brewing.

Triple Threat Approaching, the Dollar Faces a Tough Time

Standard Bank G10 strategist Steven Barrow points out that the dollar will face three levels of pressure: the potential dovish tilt of the Federal Reserve Chair appointment, the confirmation of rate hikes by the Bank of Japan, and unfavorable tariff rulings. The combined effect of these factors will create strong downward pressure on the dollar.

Currently, US President Trump has hinted at possibly appointing Chief Economic Advisor Haskett as Fed Chair. Russell Investments Global Forex Head Van Luu believes that under Haskett’s leadership, the Fed will lean more dovish, further weakening the dollar. The euro against the dollar is expected to break through this year’s high of 1.19, creating a new high in four years.

A Different Perspective: Euro to TWD Also Appreciating

The spillover effect of this euro rally is also affecting other currency pairs. The euro’s relative strength means the cost of exchanging to TWD is also rising. Investors holding euro assets or planning to exchange should pay attention to this trend — the EUR to TWD exchange rate reflects the changing capital flows behind the divergence in global central bank policies.

Conclusion: The Dollar Will Still Fall, But Timing Is Uncertain

Standard Bank’s Steven Barrow states that these three threats “even if they do not occur within the remaining weeks of this year, will definitely happen in early 2026.” This suggests the dollar’s downtrend could extend into next year, with December merely being the prelude to this cycle. Investors should closely monitor the final outcome of the Fed Chair appointment, the timing of the Bank of Japan’s rate hike, and the direction of Trump’s tariff policies — these three variables will directly determine the future trajectory of the dollar.