The US Dollar Index faces renewed pressure. Can the euro exchange rate break through the four-year high?

Recently, the euro against the US dollar (EUR/USD) has performed strongly, with a quote of 1.1637 as of December 3rd, marking the eighth consecutive trading day of gains. Meanwhile, the US dollar index also failed to reverse its downward trend, reporting 99.24, down 0.08%, marking the ninth consecutive day of decline. What market logic is behind all this?

December is the “Traditional Weak Month” for the US dollar

Historical patterns may provide answers. According to data from the past ten years, the US dollar index has fallen in December in 8 years, with a probability of 80%, and an average decline of 0.91%. This makes December the worst-performing month for the dollar throughout the year. From this perspective, the current dollar performance is not accidental but a continuation of seasonal characteristics.

Based on the average historical decline, the US dollar index still has room to fall further this month. Deutsche Bank macro strategist Tim Baker’s view is worth noting — he believes the dollar could retreat to around the lows of the third quarter, implying about a 2% downside potential for the dollar index.

Federal Reserve policy expectations and Bank of Japan movements are key

The core driver behind the dollar’s pressure comes from changing market expectations regarding Federal Reserve policy. According to 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 cuts expected in 2026. These rate cut expectations directly weaken the attractiveness of the dollar.

More importantly, expectations of rate hikes by the Bank of Japan are also brewing. Recent market data shows that investors now expect an 80% chance of the Bank of Japan raising interest rates in December. This creates a stark contrast: the dollar faces a rate-cutting cycle, while the yen is in a rate-hiking cycle. The narrowing interest rate differential will further suppress the dollar, benefiting the euro against the dollar exchange rate.

Trump policy uncertainties add variables

Political developments are also influencing the dollar outlook. US President Trump recently hinted at possibly appointing his Chief Economic Advisor, Hasset, as the next Federal Reserve Chair. This personnel adjustment could lead to a policy shift.

Russell Investments Global FX Head Van Luu pointed out that under Hasset’s leadership, the Fed might adopt a more dovish stance, which would push the dollar further weaker. His forecast is that the EUR/USD exchange rate could break through this year’s high of around 1.19 and reach a four-year high.

Triple threats threaten the dollar

Standard Bank G10 Strategist Steven Barrow analyzes from a more macro perspective that the dollar is facing a “triple hit”: the Bank of Japan’s rate hikes, policy uncertainty surrounding the Fed Chair appointment, and potential adverse factors in tariff policies. He believes these pressures, while unlikely to all erupt within the remaining cycle of this year, will start to show their effects in early 2026.

Against this backdrop, the euro, as the main counterpart to the dollar, has a relatively clear logic for appreciation. In the short term, it is difficult for the dollar to shake off downward pressure, and the probability of the euro remaining strong is higher.