In addition to Trump and the Federal Reserve, be wary of the dollar's "December curse" when trading currencies

Despite Trump's victory boosting the dollar, dollar bulls are entering a month that has historically been unfavorable for the dollar. Since the election day on November 5, the dollar has appreciated by about 2%, but seasonal factors indicate that the likelihood of further dollar appreciation from now on is low. In the last 10 years, the dollar has declined in 8 out of 12 Decembers, often falling victim to year-end portfolio rebalancing flows and the so-called "Santa Rally." The Santa Rally encourages traders to sell dollars and buy riskier assets like stocks.

This time, with Trump's statements on social media potentially disrupting the market at any moment, there is a greater chance of significant sudden volatility that makes traders uneasy. There are also 9 major central bank policy meetings and a large amount of key economic data this month. Any signs of negative surprises could trigger investors to flock to the ultimate safe-haven currency, making the notion of "selling dollars" outdated.

Vishnu Varathan, Chief Economist and Strategist at Mizuho Bank, stated, "It's best to buckle up. Typically, people would increase risk investments and sell dollars, but with Trump in office, who knows?"

Since the election, as investors from New York to Tokyo speculate on the direction of the foreign exchange market for the next four years, exchange rate volatility has surged, with the global foreign exchange market trading up to $7.5 trillion daily. The core debate revolves around the fate of the dollar during Trump's term—markets expect this to exacerbate inflation in the world's largest economy, complicating the Federal Reserve's interest rate cut outlook.

Recent market trends highlight the difficulties of trading the dollar: as of September, the Bloomberg Dollar Index had fallen for three consecutive months before reversing its trend. JP Morgan, Goldman Sachs, and Citigroup all expect the dollar to continue strengthening, as tariffs are seen as increasing price pressures and harming other economies.

Trump's influence on currency extends beyond the inflation channel—he has demanded that the so-called BRICS countries commit to not creating new currencies to replace the dollar. During Monday's Asian trading session, the Bloomberg Dollar Index rose by 0.5% at one point.

Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, stated, "The result is that, until something changes, the path of least resistance for the dollar is upward. The key for the dollar in 2025 will be tariff policy."

However, others disagree with the strong dollar outlook.

Morgan Stanley expects that as investors shift their focus from trade risks to the Federal Reserve's potential continued easing path, the dollar's strength will peak by the end of the year and gradually weaken by 2025.

Ugo Lancioni, Senior Portfolio Manager at Neuberger Berman in Milan, also stated, "We hold a small positive position on the dollar, but as the dollar appreciates, we are reducing our holdings. The dollar may enter a consolidation phase, which could last quite a long time."

The latest data from the U.S. Commodity Futures Trading Commission (CFTC) confirms this view. The level of optimism among asset management companies regarding the U.S. dollar has reached its highest level since 2016, highlighting the possibility of a decline in the dollar as investors take profits on positions benefiting from a stronger dollar.

Leah Traub, portfolio manager and head of the currency team at Lord Abbett, said, "Some of Trump's trade policies will take time to take effect. One thing we are cautious about is that the market has recognized many of these issues."

The end result may be that as investors analyze every headline and economic data point, the volatility of the dollar could increase. The indicator measuring the implied volatility of the Bloomberg Dollar Spot Index for the next six months is currently trading near its highest level in 18 months. The Federal Reserve's policy meeting in mid-December will prompt investors to readjust their bets on the dollar, while the policy outcomes of other central banks, such as the Bank of Japan and the Bank of England, will also have an impact.

Abdelak Adjriou, a fund manager at Carmignac in Paris, is one of those preparing for a new round of volatility, especially if the Federal Reserve keeps interest rates unchanged this month, catching traders off guard. Adjriou expects the Federal Reserve to lower rates subsequently, but before that, U.S. employment and inflation data may change. Nevertheless, he chooses to ignore any short-term volatility. He stated, "I am looking at the medium term; the dollar is still king."