Dollar exchange rates may drop in December, according to insights from several analysts, coupled with the historical trend of the Dollar typically weakening in December.

According to James Reilly, Senior Markets Economist at Capital Economics: “History suggests that a period of consolidation is likely after such runs – that was the case on the two previous occasions such runs were chalked up.”

The Dollar started to strengthen in October, driven by a series of US economic data releases indicating continued strength in the world's largest economy. This led investors to reduce their expectations regarding the number of interest rate cuts the Federal Reserve would implement.

The Dollar’s gains picked up pace in November following Donald Trump's and the Republican Party's victory, as investors braced for significant policy changes under Trump 2.0. 

Key factors driving expectations for higher inflation, and consequently higher interest rates at the Federal Reserve, include the potential increase in import tariffs and tax cuts, Pound Sterling Live reports.

“Strong economic growth and elevated inflation are fuelling the US Dollar against most currencies because their economies are struggling with falling economic growth and inflation. Fiscal stimulus and tariffs from Trump could fuel the Dollar even more,” stated Philip Maldia Madsen, an analyst at Nordea Bank.

Although many analysts forecast Dollar strength as a theme next year, the rapid pace of the gains has made the USD appear overvalued in the short term, creating the possibility of a setback in December.

“Investors' attitude towards Trump 2.0 led to the USD becoming significantly overvalued,” according to Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Furthermore, Reilly anticipates a period of consolidation for the Dollar before it resumes its upward trajectory. “We suspect that is likely to happen again – we forecast the DXY Index to remain around its current level for the rest of 2024. But we think it will ultimately break higher, reaching 111 by end-2025.”

Moreover, the GBP/USD exchange rate has dropped by 6.5% from its September peak and appears to be finding short-term support at 1.25.

Similarly, the EUR/USD exchange rate has declined by a comparable amount and seems to be establishing a base above 1.04.