Federal Reserve policy shift boosts, and the dollar index's decline is hard to stop

Central Bank Decision Shakes Forex Market, The US Dollar Faces Multiple Pressures

The US Dollar Index has recently been weak, declining for the ninth consecutive trading day, with the latest quote at 99.24, down 0.08%. Simultaneously, the euro against the US dollar (EUR/USD) has risen for eight days in a row, currently at 1.1637. Behind this rebound is the market’s continued expectation of the Federal Reserve’s easing policy.

According to the latest data from CME FedWatch Tool, the market assigns an 89.2% probability of the Federal Reserve cutting interest rates by 25 basis points in December, with further expectations of two more rate cuts in 2026. This expectation has driven the US dollar’s depreciation and boosted the euro’s relative performance.

Historical Trends Show December Usually Not Favorable for the US Dollar

Statistics from the past ten years show that the US Dollar Index has declined in December in 8 out of 10 years, with an 80% probability, and an average decline of 0.91%, making it the weakest month of the year. Deutsche Bank macro strategist Tim Baker believes that based on historical trends, the US dollar index is still expected to fall back to around the lows of the third quarter, implying a further 2% downside potential.

Multiple Factors Combine to Keep the US Dollar Under Pressure

Deutsche Bank G10 strategist Steven Barrow pointed out that the US dollar faces three major challenges ahead: expectations of a rate hike by the Bank of Japan (currently, the market prices an 80% chance of a rate hike in December), potential changes in the leadership of the Federal Reserve, and adverse factors related to trade policies. Even if these variables do not materialize before the end of the year, they are highly likely to impact the market in early 2026.

US President Trump has hinted at the possibility of appointing Chief Economic Advisor Haskett to lead the Federal Reserve. Russell Investments Global Foreign Exchange Head Van Luu said that under Haskett’s leadership, the Fed’s policy stance is expected to become more moderate, further supporting the US dollar’s downward trend. He predicts that the euro against the dollar will break through this year’s high of about 1.19, reaching a four-year high.

The combined influence of the Fed’s policy direction, the Bank of Japan’s rate hike pace, and changes in the global trade environment has exerted continuous downward pressure on the US dollar and created rare opportunities for the euro to appreciate.