The US dollar comes under pressure while the euro appreciates; multiple factors trigger a year-end market shift

The US Dollar Index has recently fallen into a downturn, while the euro demonstrates strong momentum. As of December 3rd, the US Dollar Index dropped to 99.24, marking nine consecutive trading days of decline, while EUR/USD continued its upward trend, quoted at 1.1637. What market logic underlies these changes?

Rate Cut Expectations Become a Suppressive Factor for the Dollar

The Federal Reserve’s policy direction directly impacts the dollar’s liquidity. According to data from 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 the possibility of two more rate cuts in 2026. This increasing expectation of easing keeps the dollar lacking upward momentum.

Historically, the dollar index tends to perform poorly in December. Data from the past ten years show that the dollar index declined in December in 8 out of 10 years, with a decline probability of 80% and an average drop of about 0.91%, making December the weakest month of the year. If this trend continues, there is about a 2% chance of the dollar index declining further by year-end.

Bank of Japan Policy Shift and Fed Personnel Changes as Key Variables

The direction of the dollar is influenced by multiple factors. Currently, the market expects an 80% chance of the Bank of Japan raising interest rates in December, which would directly strengthen the yen and exert pressure on the dollar.

Meanwhile, the appointment of the Fed Chair is another key focus. US President Trump has hinted at possibly nominating Chief Economic Advisor Harker as Fed Chair, which could alter the Fed’s policy stance. Van Luu, head of global FX at Russell Investments, believes that under Harker’s leadership, the Fed might adopt a more dovish approach, further weakening the dollar. Van Luu expects EUR/USD to potentially break through this year’s high of around 1.19, reaching a four-year high.

Multiple Pressures Combine, the Dollar Faces “Triple Blow”

Standard Bank’s G10 strategist Steven Barrow points out that the combined pressures of the Bank of Japan rate hike, Harker’s leadership at the Fed, and unfavorable tariff policies will exert a compounded impact on the dollar. He states that even if these effects are not realized before the end of the year, they are likely to manifest in early 2026.

Deutsche Bank macro strategist Tim Baker provides a specific technical target: the dollar index is expected to fall back to the lows seen in Q3, implying about a 2% downside potential.

The upward trend of EUR/USD and the continued decline of the dollar index point in the same direction: a structural shift is occurring in the year-end market.