## The Fed's Rate Cut Expectations Warm Up, Will the Euro Fall Again? The US Dollar Index Faces Triple Pressure

Industry experts generally remain optimistic about the euro's future. Van Luu, Head of Global Forex at Russell Investments, believes that under the leadership of new Federal Reserve Chair Janet Yellen, US dollar policy will shift towards a more dovish stance. This will further weaken the dollar's competitiveness, and the EUR/USD is expected to break through this year's high of around 1.19, reaching a nearly four-year high.

Standard Bank G10 Strategist Steven Barrow pointed out that the dollar will face synchronized pressure from three directions: the Bank of Japan is expected to raise interest rates in December, the Federal Reserve leadership change leans towards easing policies, and trade tariff policies face unfavorable developments. He stated that the impact of these three factors "even if not occurring before the end of the year, will inevitably affect the market in early 2026."

**December is the traditional weak period for the dollar**

Historical statistics show that over the past ten years, the probability of the US dollar index declining in December is as high as 80%, with an average decline of about 0.91%, making it the weakest month of the year. The market performance on December 3rd confirmed this trend — the dollar index fell 0.08% to 99.24, marking nine consecutive trading days of decline; meanwhile, EUR/USD rose to 1.1637, continuing an eighth day of gains.

**Rate cut expectations are the key driver**

According to the latest data from CME FedWatch Tool, the market expects an 89.2% chance of the Fed cutting interest rates by 25 basis points in December, with expectations of two more rate cuts in 2026. These rate cut expectations continue to exert downward pressure on the dollar.

At the same time, signals of a rate hike from the Bank of Japan are also brewing. The latest market data shows that the probability of a rate hike by the Bank of Japan in December has risen to 80%, forming a stark contrast with the Fed's easing stance, further widening the US-Japan interest rate differential, which is unfavorable for the dollar.

**The dollar still has about 2% downside space**

Deutsche Bank macro strategist Tim Baker analyzed that the dollar index is expected to fall back to near the lows of the third quarter, implying about 2% room for adjustment from current levels. Coupled with the seasonal weakness in December, the downside risk for the dollar warrants attention.

Overall, the shift in Fed policy, rising expectations of a rate hike by the Bank of Japan, and factors such as Trump's government economic advisor Hasset potentially becoming Fed Chair all point to further weakening of the dollar. The upward momentum of the euro against the dollar remains, and investors should closely monitor how these policy changes ultimately unfold.