The US dollar faces increasing downward pressure! The Fed's policy shift and the Bank of Japan's rate hikes create a double whammy

The US dollar index has recently fallen into weakness, declining for nine consecutive trading days, closing at 99.24 on December 3rd, down 0.08%. Meanwhile, the euro against the US dollar (EUR/USD) has performed strongly, rising for the eighth straight day, with the latest quote at 1.1637. What are the underlying reasons behind this downward pressure on the dollar?

**Expectations of Fed rate cuts are the main reason for the dollar's pressure**

Market expectation shifts are reshaping the foreign exchange landscape. According to data from the CME FedWatch tool, the probability of the Federal Reserve cutting interest rates by 25 basis points in December is 89.2%, with clear expectations of further cuts in 2026. The rising expectation of rate cuts directly suppresses the attractiveness of the dollar, as a lower interest rate environment typically leads to dollar depreciation.

**Historical patterns reveal weak dollar performance in December**

Statistical data from the past ten years show that the US dollar index has fallen in December 80% of the time, making it the worst-performing month of the year, with an average decline of 0.91%. This historical pattern supports the current weak trend of the dollar.

**Multiple factors indicate a pressured outlook for the dollar**

Van Luu, head of global FX at Russell Investments, stated that if Jerome Powell's successor is Chief Economic Advisor Haskett, the Fed may adopt a more dovish stance during his tenure, further weakening the dollar. In this scenario, the EUR/USD could break through this year's high of around 1.19, reaching a four-year high.

Standard Bank's G10 strategist Steven Barrow pointed out that the Bank of Japan's rate hike (market expectation now at 80%), potential leadership changes at the Fed, and headwinds in tariff policies will continue to exert downward pressure on the dollar. He believes these impacts will not be fully realized within the remaining time of this year and will extend into early 2026.

Deutsche Bank macro strategist Tim Baker's calculations are more specific, suggesting the dollar index could fall back to levels near the lows of Q3, implying about a 2% further decline.

**How should investors respond**

The weakening of the dollar index and the relative strength of the euro reflect market expectations of diverging global monetary policies. The policy divergence between the Fed's shift and the Bank of Japan's rate hikes will be a key factor in determining the dollar's future trajectory.