On December 1, the US dollar showed strength on the first trading day of December, leading the euro to fall sharply against the dollar, reaching a low of 1.0461, marking the biggest single-day drop since early November. This decline is closely tied to the political crisis facing the current French government, with increased market concerns over the possibility of the French government's collapse. If the government falls, plans to curb the surge in budget deficits are expected to be stalled. Additionally, robust US manufacturing data has also strongly supported the dollar, especially with strong manufacturing data released by the Institute for Supply Management (ISM) and S&P Global, furthering the dollar index's upward trend.
Tariff threats issued by Trump over the weekend have once again put pressure on global non-dollar currencies. Particularly for the euro, a weighted currency in the US dollar index, its continued pressure has directly propelled the dollar upward. Over the past nine weeks, the US dollar index has shown an upward trend in seven weeks, highlighting the strong momentum of dollar bulls.
Looking ahead to December, the foreign exchange market remains full of uncertainties. The bullish factors for the dollar are quite apparent, but there are also potential risks that may exert pressure on its continued rise.
Factors Favoring the Dollar
Firstly, the Trump administration may further escalate trade tensions, which is undoubtedly one of the main factors driving the dollar's rise. Trump might adopt more aggressive trade policies globally after taking office, particularly with tariff threats against China and other trade partner countries. Since the US election, market volatility in foreign exchange has significantly increased, and global investors are devising various strategies for the dollar's trajectory over the next four years. Trump's presidency might intensify inflationary pressures in the US, complicating expectations for Federal Reserve policy and potentially affecting the pace of interest rate hikes, thus impacting the dollar.
Moreover, the US economy continues to perform strongly, especially in the manufacturing sector. Manufacturing data released by the Institute for Supply Management (ISM) and S&P Global indicates that US manufacturing activity remains in expansion mode, supporting the dollar. Strong economic data has also heightened market expectations that the Federal Reserve may continue rate hikes in the future, further boosting the dollar.
Market Risks and Factors Hampering the Dollar's Rise
Despite numerous factors favoring the dollar, there are also inherent risks that could suppress its further appreciation. Primarily, global economic uncertainty persists, particularly with the economic slowdown in Europe and China, which might affect the dollar's strength. If global economic growth weakens, especially with a slowdown in Europe and China, the dollar may face competitive pressure from other major currencies. Additionally, although the US economy is strong, its fiscal deficit problem remains severe, potentially posing challenges for fiscal stimulus policies and thus affecting the dollar's course.
On the other hand, while Trump's tariff threats might temporarily boost the dollar, in the long term, global trade tensions could impact the global economy, ultimately reflecting back on the dollar's trajectory. Therefore, there remains considerable debate over the actual impact of Trump's trade policies within the market, which might lead to certain volatility risks for the dollar in the coming months.
Macroeconomic Background of the Forex Market
At the macroeconomic level, the forex market in December will closely watch US economic data, particularly employment data, manufacturing data, and Federal Reserve monetary policy movements. Whether the Federal Reserve will continue rate hikes, especially amid global economic uncertainties, will be a key factor in determining the dollar's trend. Meanwhile, changes in monetary policies of other economies, especially the economic recovery processes in the Eurozone and Japan, will also influence the dollar.
Overall, although the dollar surged on the first trading day of December, the complexity of the forex market renders the future trend full of uncertainties. Investors need to closely monitor global economic data, changes in political situations, and Federal Reserve policy movements to manage potential market fluctuations.
