A Late December Pattern of Dollar Softness Against Europe’s Dominant Currency

December 5, 2022

It’s only December 5th, and the dollar experienced a strong session today as investors second-guessed earlier presumptions that the FOMC will raise its federal funds target by a smaller amount later this week. A cross-current to keep in mind, however, is that the second half of December has historically been a period when the dollar losses traction against Europe’s main currency, which has been the euro since 1999 and was the Deutsche mark prior to then.

This yearend tendency was very pronounced during the early days of flexible dollar rates following the March 1973 abandonment of fixed parities. Between mid-December and end-December from 1974 through 1987, the dollar recorded a net gain against the Deutsche mark only in 1984, while depreciating in those end-of-year weeks in each of the other 13 years. The dollar’s average loss over all fourteen of those years during the second half of December was 1.7%.

Seasonal dollar weakness in late December became gradually less pronounced thereafter. Over the ten years through and including 2014, the dollar posted zero net movement against the euro between mid- and end-December and appreciated on average 0.5% in the six Decembers ending in 2015. Two plausible reasons for the fading seasonal dollar biasĀ  in late December included low inflation in the U.S. and elsewhere and the unification of European monetary policies and the region’s currency after 1998. But just as it seemed that any dollar bias toward weakness had all but vanished, the phenomenon may be making a comeback. In the last five Decembers, the dollar fell during the second half of the month against the euro by 1.1% in 2016, 2.1% in 2017, 1.2% in 2018, 0.7% in 2019, 1.2% in 2020 and 0.8% last year. 2022 has seen U.S. and global inflation rise to levels not seen in four decades. That’s an extra reason to watch out for the possibility of the dollar softening in the final days of thisĀ  month.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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