On Thursday (December 5th) at 18:05 Beijing time, the US dollar index was at 106.1596/1721, a decrease of 0.18%. EUR/USD closed at 1.0532/33, up 0.22%. USD/JPY closed at 150.282/92, a decrease of 0.21%.

The foreign exchange market is consolidating, with the United States releasing important non farm payroll data on Friday, while the US dollar has weakened after yesterday's disappointing ISM service sector data. The collapse of the French government did not have a significant impact on the euro, and investors' short-term focus is on whether the Bank of Japan will raise interest rates on December 20th.

US dollar: The US dollar has recovered some gains

The service industry index released by the Institute for Supply Management (ISM) yesterday was disappointing and increased the possibility of the Federal Reserve cutting interest rates on December 18th, resulting in a slight weakening of the US dollar index. Affected by this news, the yield of short-term US treasury bond bonds fell sharply by 8 basis points, because this data reminds investors that although everyone is paying attention to the next US government recently, the Federal Reserve is in the middle of the easing cycle.

Foreign exchange observer Barry Eichengreen published a column in the Financial Times. The title of this article is "The Turning Point of the US Dollar is Coming", which is a warning for those who are bullish on the US dollar. But most of the content of this article focuses on why the US dollar will first strengthen and then weaken in the medium term after the Federal Reserve has to raise interest rates to slow down inflation caused by tariffs, and may also lower interest rates leading to an economic recession. This sounds like a story of a bear market for the US dollar as early as the end of 2026, or even possibly in 2027.

Our view is that 2025 will be the year when Donald Trump injects more air into the dollar foam. In fact, some clients are asking if there will be a situation similar to the 1985 Plaza Accord that weakens the US dollar. We think this possibility is very low, but it will only occur in 2026 or 2027. In history, the Plaza Accord was introduced four years after President Reagan implemented expansionary policies.

In the short term, the US data calendar is light today. Recently, the number of first-time jobless claims per week has remained at a very low level, but Friday's non farm payroll data will have a greater impact on the next move of the US dollar.

Despite the decline in short-term interest rates in the United States, events in Europe have kept the US dollar trade weighted index relatively competitive. We expect that if the US dollar index falls below 106, there will be good demand for US dollars.

Euro: The French political situation has caused a downturn in the euro

The French government has collapsed. Although some people may see this as a positive aspect as fiscal austerity measures have been postponed, we believe that weak business investment means France will only grow by 0.6% next year. In addition, Germany will contract by 0.2% next year, and the GDP of the Eurozone this year is only 0.7% - a large part of which is contributed by Southern Europe. We expect the European Central Bank to cut interest rates to 1.75% next year. This will keep the short-term spread of the euro against the US dollar around 200 basis points throughout the year, bringing the euro close to parity with the US dollar.

As for today's Eurozone data, we see more weak industrial data and a downward correction in Eurozone retail sales. The short-term resistance level of 1.0550 may be within the range of the euro/dollar recovery, and considering that there will be over $5 billion worth of 1.0500 forex options expiring at this level in the next week, we believe that the euro/dollar will hover around 1.0500 in the coming days.

In other aspects, the GBP/USD briefly sold before rebounding. Previously, Bank of England Governor Bailey seemed to confirm that the Bank of England was considering cutting interest rates four times next year, while market expectations were only three times. However, these statements do seem a bit 'technical' as they only confirm the data used by the Bank of England in its forecasting model. It is expected that the euro/pound will maintain a moderate selling price. Please pay attention to today's inflation expectations and the speech of hawkish Meghan Green at the Bank of England.

Japanese Yen: The Bank of Japan is about to raise interest rates

Due to the statement by Bank of Japan policy member Fumiaki Nakamura that he is not opposed to interest rate hikes, the US dollar/Japanese yen saw a slight decline this morning. Prior to this, there was significant market volatility regarding whether the Bank of Japan would raise interest rates this month. We believe that tomorrow's release of Japan's October salary data will support this viewpoint.

The Japanese yen has performed well in the cross sector, and the prospect of the Bank of Japan raising interest rates is inconsistent with the monetary easing policies being implemented in other G10 countries. The events that occurred in South Korea this week have also increased safe haven buying of the yen. We are optimistic about the US dollar, but if tomorrow's US non farm payroll data disappoints, the weakness of the US dollar should be most evident in the USD/JPY ratio.

However, the weak EUR/JPY seems to have a clearer trend, with cross exchange rates such as the Swedish krona/yen already meeting the targets we set in our 2025 forecast.