The US Dollar Index remains under pressure and weakens. Can the Euro seize the opportunity to break through its historical high?

The December forex market is playing out a classic showdown. The US Dollar Index has recently fallen into a continuous decline, closing at 99.24 on December 3rd, after several days of consecutive drops; meanwhile, the euro against the US dollar has performed strongly, with the latest price reaching 1.1637, continuing its upward trend. What market logic is hidden behind this?

Expectations of rate cuts become the main pressure on the US Dollar Index

Market expectations for Federal Reserve policy are subtly changing. According to the latest data from CME FedWatch Tool, traders have an 89.2% confidence that the Federal Reserve will implement a rate cut in December, with a 25 basis point decrease expected. Additionally, the market anticipates two more rate cut opportunities in 2026. This ongoing environment of rate cut expectations naturally exerts continuous pressure on the US Dollar Index.

December has always been a “difficult month” for the US dollar

Reviewing data from the past ten years reveals an interesting pattern: the US Dollar Index has a probability of up to 80% of declining in December. In other words, in eight out of ten years, December has been a down month. Even more noteworthy, the average decline reaches 0.91%, making December the month with the poorest performance of the year. This historical pattern strongly supports the current market performance.

Two key variables that determine the future direction of the US dollar

Whether the US dollar can continue to decline, according to Tim Baker, a macro strategist at Deutsche Bank, there is still about a 2% downside potential, with the dollar expected to fall back to levels near those of the third quarter. The realization of this trend depends on developments in two areas.

First is the policy stance of the Bank of Japan. The latest market survey shows that traders now expect an 80% probability of the Bank of Japan raising interest rates in December. If this rate hike materializes, it will provide strong support for the dollar.

Second is the change in leadership at the Federal Reserve. US President Trump has hinted at the possibility of appointing Chief Economic Advisor Harker as the Fed Chair. Van Luu, head of global forex at Russell Investments, pointed out that under Harker’s leadership, the Fed’s policy tone might shift toward a more moderate stance, further weakening the US dollar index. The euro against the dollar is expected to break through this year’s high of about 1.19, creating a four-year high.

Is the US dollar facing a triple blow?

Standard Bank G10 Strategist Steven Barrow offers a thought-provoking assessment: the combination of the Bank of Japan rate hike, the update on the Fed Chair candidate, and the negative impact of tariff policies are collectively hitting the US dollar index. “Even if these changes are not fully realized within the remaining time of this year, they are bound to materialize one by one in early 2026,” he said.

From a technical perspective, the current position of the US Dollar Index is close to a cyclical low. The market consensus is that, under the backdrop of the Fed’s rate cut window still open and the increasing certainty of a rate hike by the Bank of Japan, the US dollar index will find it difficult to shake off its weakness. The euro, driven by multiple positive factors, is expected to embark on a new upward trend.