The US Dollar is expected to weaken by the end of the year, driven by seasonal trends and stable Treasury markets. Commodity-linked currencies are performing well, with EUR/USD and USD/JPY targeting 1.18 and 152, respectively, as FX market volatility stays low. Interest rate volatility in the US is at yearly lows, as indicated by the MOVE index. Stable Treasury markets have pleased many in 2025. A rise in two-year US real interest rates, due to decreasing inflation expectations, implies a weaker dollar. There is a shared belief that the dollar will weaken by year’s end, with targets set for EUR/USD and USD/JPY. Despite recent strength in the US Dollar, broader DXY losses continue. Some currency pairs show positive movement, but worries about US inflation data remain. Gold stays below $4,250 as traders wait for the US PCE data to decide on direction. The Michigan Consumer Sentiment Index is expected to improve slightly in December, though consumer confidence is low due to a stagnant labor market and rising prices. Attention now turns to upcoming global central bank meetings. We clearly see a trend of continued US Dollar weakness as we approach the end of the year. The DXY has closed below the 99.00 level for the past week, with yesterday’s close at 98.85 reinforcing this downward trend. Traders should consider positioning for a further drop towards the 97.80 support zone. The calm in the US Treasury market, with the MOVE index falling below 85 this week, is a major factor. This quiet period has reduced implied volatility in FX options, making them cheaper. For traders, this is a chance to buy directional options, such as puts on the dollar, to profit from a possible sharp move with limited risk. The Euro shows strength, making the 1.18 target for EUR/USD highly attainable before the year ends. Recent data, like the stronger-than-expected German IFO Business Climate index released this past Tuesday, confirms solid growth in the Eurozone. We suggest buying January 2026 call options with a strike price around 1.1750 for a good risk-reward profile. The rise of commodity-linked currencies is a trend we expect to grow. Copper prices have just crossed the $5.50 per pound mark, a height not seen since supply disruptions in 2023. This should benefit currencies like the Australian Dollar, making AUD/USD call options particularly appealing. Our bearish outlook on the dollar is backed by historical year-end patterns. Data shows the DXY has finished lower in December in seven of the ten years leading up to 2025, as global companies often sell dollars to bring back profits. This seasonal challenge boosts our confidence in maintaining short-dollar derivative positions through the holiday season.

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