The US dollar faces renewed pressure. Can the euro break through the four-year high?

Market data shows an interesting pattern: over the past ten years, the probability of the US dollar index declining in December has reached 80%, with an average drop of about 0.91%, making it the weakest month of the year. Against this historical background, the current trend of the dollar is even more worth paying attention to.

As of December 3rd, the US dollar index is at 99.24, having fallen for nine consecutive days. Meanwhile, the EUR/USD has also experienced an eight-day rally, with the latest quote at 1.1637. Behind this surge is the market’s growing expectation of a shift in Federal Reserve policy.

Fed Rate Cut Expectations Boost the Euro

The latest data from CME Group’s FedWatch tool clearly illustrates the situation: the market currently prices in an 89.2% chance of the Federal Reserve cutting interest rates by 25 basis points in December, and it is also pricing in two rate cuts in 2026. The rising expectation of rate cuts is putting direct pressure on the dollar, which is why the euro is able to strengthen against the trend.

However, the dollar’s future performance depends on two key variables. One is the stance of the Bank of Japan, and the other is the potential candidate for the new Fed chair.

Three Major Factors Will Deeply Impact the Dollar

Current market expectations indicate that the probability of the Bank of Japan raising interest rates in December has risen to 80%. If the central bank actually hikes rates, the yen will inevitably be supported.

More notably, there are changes in the potential candidates for the Fed chair. There are reports suggesting that the new US leadership may appoint as the Federal Reserve Chair. This personnel change could lead to a significant shift in the Fed’s policy stance—leaning towards a more dovish approach. Van Luu, Global Forex Head at Russell Investments, believes that under Haskett’s leadership, the Fed will adopt a more dovish stance, which will further weaken the dollar. He predicts that EUR/USD could break through this year’s high of around 1.19, reaching a near four-year high.

Standard Bank’s G10 Strategy Head Steven Barrow provides a more comprehensive analysis: the combination of a rate hike by the Bank of Japan, a change in the Fed chair candidate, and potential adverse factors related to tariffs could all substantially impact the dollar. Even if these factors do not all materialize within the remaining weeks of this year, they are likely to come to a head in early 2026.

How Much More Can the Dollar Fall?

Deutsche Bank macro strategist Tim Baker has set a specific downside target: the dollar index could fall back to the lows of the third quarter, implying about a 2% further decline. Based on historical patterns and current fundamentals, the likelihood of the dollar continuing its decline in December is quite high.