When will the US dollar stop falling? The euro breaks through a four-year high and is expected

The EUR/USD exchange rate has recently shown a strong upward momentum, rising for eight consecutive days to 1.1637, while the US Dollar Index has been in a continuous weakening trend, falling for nine days to 99.24. The driving force behind this dollar retreat mainly stems from the market’s reassessment of the Federal Reserve’s rate cut pace.

According to the latest data from CME FedWatch Tool, investors currently expect an 89.2% probability that the Federal Reserve will implement a 25 bps rate cut in December, with two more rate cuts possible in 2026. The increasing expectation of rate cuts directly impacts the safe-haven appeal of the dollar, thereby boosting the relative strength of the euro.

December is traditionally a weak month for the dollar

Historical trends provide strong reference points. Over the past ten years, the US Dollar Index has declined in December in eight of those years, with a decline probability of 80%, and an average annual drop of 0.91%. From a statistical perspective, December has become the weakest month for the dollar’s performance throughout the year. Extending this pattern, the USD Index may fall by another approximately 2%.

Policy variables will determine the dollar’s direction

Whether the dollar can continue its weakness depends on two policy variables. The first is the Bank of Japan’s interest rate hike trajectory, with the latest expectations indicating an 80% chance of a rate increase in December. The second is the confirmation of the Federal Reserve Chairperson candidate.

The Trump administration has revealed that Chief Economic Advisor Haskett may succeed as the Fed Chair. This personnel arrangement has attracted widespread market attention, with foreign exchange investment firms generally believing that under Haskett’s leadership, Fed policies may become more dovish, exerting further pressure on the dollar.

Experts forecast: the euro may hit new highs

Russell Investments’ Global Foreign Exchange Department head analyzed that if Haskett indeed takes office, it will accelerate the dollar’s weakening process, and the EUR/USD could break through this year’s high of around 1.19, reaching a near four-year high.

Standard Bank’s G10 Strategy Team pointed out that the Bank of Japan’s rate hike, the potential dovish tilt of the Fed leadership, and adverse trade policy factors will create a triple impact that will significantly suppress the dollar. Even if these changes are not fully realized within the remaining part of this year, they are very likely to gradually manifest in early 2026.

Deutsche Bank’s macro strategy department provided a more specific analysis. The bank expects the USD Index to fall back to near the lows of the third quarter, implying about a 2% downside for the dollar. This magnitude aligns with historical statistical patterns, further reinforcing market expectations of a continued dollar decline.

Overall, whether the dollar will continue its weakening trend mainly depends on the Bank of Japan’s policy decisions, the confirmation of the Fed Chairperson candidate, and the evolution of the global trade environment. Under the current policy expectations and market sentiment, there remains a considerable possibility for the EUR/USD to break new highs.