The dollar's seasonal weakness is established

December was already a seasonally weak month for the dollar, coinciding with rising expectations of aggressive easing by the Federal Reserve, with monetary policy divergence providing support for the yen and the Australian dollar.

The beginning of everything is difficult! Since the beginning of winter, the decline of the dollar has accelerated, a trend that is highly consistent with seasonal patterns. December has traditionally been a "bear market month" for the dollar - it has fallen as many as 18 times in the past 25 years. Non-residents have to sell dollars to repatriate profits from US stocks and Treasuries, a process that could give new impetus to the euro's rise against the dollar given historically high foreign investor demand for US securities.

Usually in December, the dollar is weakest against the Swiss franc and the Swedish krona, and the game against the yen and the Canadian dollar will also enter a white-hot stage. The yen is expected to be the biggest winner this time, and the market expects the Bank of Japan to raise interest rates in December. With the probability of the Bank of Japan raising the base rate from 0.5% to 0.75% on December 19, the decline of the dollar against the yen is continuing.

(Dollar index daily chart, source: Internet)

Investors are trading around monetary policy divergence. The US Federal Reserve is expected to cut interest rates to 3 per cent in 2026, while the Bank of Japan is expected to raise rates to 1.25 per cent. The narrowing of the spread between bond yields between the two countries will be driven next yearforeign exchange marketFunds are tilted towards the yen.

"The wait is even more torturous". Donald Trump's previous statement that a new Federal Reserve chair would be announced in early 2026, rather than before Christmas as Scott Bessant had predicted, did not support the dollar. Combined with market expectations that Kevin Hassett will become the chairperson of the Federal Reserve, expectations of the scale of monetary policy easing continue to rise, which is undoubtedly bad news for the dollar.

Other currencies are taking advantage of a window of weakness in the dollar. The Australian dollar rose to a five-week high against the dollar as expectations for a rate rise by the Reserve Bank of Australia next year rose, driven by accelerating inflation. The Australian dollar was supported by a rise in US equity indices and improved global risk appetite.