Will the US dollar continue to fall? Three major factors will determine December's trend

The US dollar is facing multiple pressures. On December 3rd, the US Dollar Index (DXY) was at 99.24, marking its ninth consecutive day of decline; the EUR/USD pair rose for the eighth straight day, currently at 1.1637 at the time of writing. Will the dollar continue to fall? The answer depends on three key factors.

**Expectations of rate cuts put pressure on the dollar**

The ongoing anticipation of a rate cut by the Federal Reserve is the main driver behind the dollar's weakness. According to the CME FedWatch Tool, the market prices in an 89.2% chance of a 25 basis point rate cut in December, with two more rate cuts expected in 2026. This dovish policy outlook has undermined the dollar's support.

Historical patterns also support the view that the dollar may decline. Data from the past 10 years show that the US Dollar Index has fallen in December 8 times, with an 80% probability and an average decline of 0.91%, making it the weakest month of the year.

**Bank of Japan rate hike becomes a key variable**

Latest data indicates that the market now prices in an 80% chance of the Bank of Japan raising interest rates in December. Steven Barrow, Head of G10 Strategy at Standard Bank, believes that a rate hike by the BOJ, combined with the new leadership of the Federal Reserve and unfavorable tariffs, will exert a threefold impact on the dollar. "Even if it doesn't happen at the end of the year, it will definitely become evident in early 2026."

**New chair candidate hints at dovish shift**

US President Trump has hinted at nominating Chief Economic Advisor Haskett as the Federal Reserve Chair. Van Luu, Head of Global Forex at Russell Investments, states that Haskett's leadership style will be more dovish, which could further weaken the dollar. Under this expectation, the EUR/USD pair is likely to break through this year's high of around 1.19, reaching a four-year high.

**Room for further decline remains**

Tim Baker, Macro Strategist at Deutsche Bank, points out that the dollar is expected to retreat to near its Q3 lows, implying a further 2% downside for the US Dollar Index. Based on comprehensive analysis, the combined effects of rate cuts, central bank policies, and personnel changes suggest that the dollar still has potential for further decline in December and subsequent months.