Is the US Dollar Index under pressure, with room to decline further by the end of the year?

December has historically been unfavorable for the US dollar index. Based on the market performance over the past ten years, the probability of the US dollar index declining in December is as high as 80%, with an average drop of 0.91%, making it the weakest month of the year. Since the beginning of December, this trend has started to emerge— the US dollar index has fallen to 99.24, marking nine consecutive days of decline, while the euro against the dollar has risen steadily to 1.1637.

Multiple Factors Support the Dollar’s Pressure

The fundamental reason for the current weakness of the dollar stems from the market’s increasing expectations of a Fed rate cut. According to the CME FedWatch tool, the market currently prices in an 89.2% chance of the Federal Reserve cutting interest rates by 25 basis points in December, with expectations of two more rate cuts in 2026. Meanwhile, expectations for the Bank of Japan to raise interest rates are also rising, with the latest data indicating an 80% probability of a rate hike in December.

Decisive Factors for Future Trends

The subsequent performance of the US dollar index will depend on two key variables. First is personnel changes within the Federal Reserve leadership— US President Trump has hinted at nominating Chief Economic Advisor Haskett as the Fed Chair. Second is the policy direction of the Bank of Japan.

Van Luu, Head of Global Forex at Russell Investments, pointed out that under Haskett’s leadership, the Fed may adopt a more dovish policy stance. This would further weaken the dollar, and the euro against the dollar is expected to break through this year’s high of around 1.19, creating a four-year high.

Limited Room for Expert Predictions

Steven Barrow, G10 Strategy Chief at Standard Bank, believes that the threefold impact of the Bank of Japan’s rate hike, the Fed’s policy adjustments, and unfavorable tariff policies will exert pressure on the dollar. These effects may gradually manifest in the remaining months of this year or early 2026.

Deutsche Bank macro strategist Tim Baker further pointed out that the US dollar index is expected to retest the lows near the third quarter, which means there is about a 2% downside potential. If this prediction materializes, it will provide momentum for the euro to rise further.