The US Dollar started December off weak against major currencies because of narrowing interest rate differences. Investors are watching November’s ISM manufacturing data and waiting for President Trump to announce his pick for the new Fed chair. The ISM manufacturing index for November is expected to be 49.0, slightly up from 48.7 in October. This suggests slower contraction in manufacturing. In October, the Prices Paid sub-index dropped to a nine-month low of 58.0, while the Employment measure increased to a five-month high of 46.0. These changes hint at easing inflation and moderate job losses.

Nomination for Federal Reserve Chair

President Trump will soon announce his nominee for the Federal Reserve chair, with Kevin Hassett considered a top candidate. Hassett has pushed for more aggressive rate cuts, which aligns with Trump’s view that rates should be much lower. If confirmed, his term as Fed Chair would begin in May 2026, replacing Jay Powell. With the dollar weak at the start of December, now might be a good time to bet on its continued decline. The shrinking interest rate gap between the US and other major economies drives this view. For example, the difference between the U.S. 2-year Treasury yield and the German 2-year bund yield has tightened by 20 basis points in the past month, indicating less reason to hold dollars. This situation suggests that buying call options on major currencies against the dollar, like EUR/USD or GBP/USD, could be a smart move in the coming weeks. Implied volatility in currency options is rising, with the CBOE EuroCurrency Volatility Index (EVZ) reaching a three-month high. This indicates that the market is preparing for bigger price movements, making option strategies that benefit from such shifts more relevant.

Implications of a Weaker Dollar

The possible nomination of Kevin Hassett as the next Fed Chair strengthens the bearish outlook for the dollar. His preference for aggressive rate cuts could speed up the dollar’s decline if he is confirmed. The fed funds futures market has responded, now showing over a 60% chance of a rate cut in the first half of 2026, up from just 35% a month ago. While the dollar trend is generally downward, today’s ISM manufacturing data might cause short-term fluctuations. The index has mostly been in contraction for 2025, so any significant improvement beyond the forecast of 49.0 could lead to a brief dollar rally. Traders might consider using short-dated options, like straddles on the USD/JPY pair, to take advantage of this potential volatility. A weaker dollar usually helps US multinational companies by increasing the value of their overseas earnings. This might lead to gains in equity derivatives linked to export-heavy sectors. We might explore call options on indices like the S&P 500 or specific sector ETFs that rely heavily on international revenue. Create your live VT Markets account and start trading now.

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