The dollar has entered what is historically a dangerous December for it, but Trump's victory has emboldened dollar bulls.

Since the U.S. election on November 5, the dollar exchange rate has risen by about 2%, but seasonal factors suggest that the dollar will face headwinds from now on. In the past ten Decembers, the dollar has fallen in eight of them, usually victims of year-end portfolio rebalancing flows and the so-called 'Santa Claus rally,' which leads traders to boldly sell dollars for riskier assets like stocks.

The dollar tends to decline in December.

Comments made by Trump on social media could disrupt the markets, making traders uneasy, and with nine major central bank policy meetings and a lot of important economic data this month, the likelihood of significant and sudden volatility is higher. Any slight negative surprise could trigger a rush for the ultimate safe-haven currency, rendering the December 'sell the dollar' thesis outdated.

Vishnu Varathan, the chief economist and strategist at RHB Bank, said: "You better buckle up. Typically, you'd be stepping on the risk pedal and selling dollars, but with Trump taking office, who knows?"

Since the U.S. election, currency volatility has surged as investors from New York to Tokyo predict what will happen in the foreign exchange market, which sees daily trading volumes of $7.5 trillion over the next four years. The crux of the debate is the fate of the dollar during Trump's presidency—expected to exacerbate inflation in the world's largest economy, complicating the Fed's rate-cut outlook.

Recent market behavior highlights the difficulty of trading the dollar: the Bloomberg Dollar Index fell for three consecutive months before reversing in September. JPMorgan, Goldman Sachs, and Citigroup all expect the dollar to continue strengthening as tariffs are seen to increase price pressures and harm other economies.

Trump's influence on currencies is not limited to inflation channels—last weekend, he urged BRICS countries to commit to not creating new currencies to replace the use of the dollar. On Monday during Asian trading hours, the Bloomberg Dollar Index rose by 0.5%.

Kathy Jones, chief fixed income strategist at Charles Schwab, said: "The result is that, unless something changes, a stronger dollar is the path of least resistance. The key to the dollar's performance in 2025 is tariff policy."

There are also dissenting views on the strength of the dollar.

Morgan Stanley believes that as investors shift from focusing on trade risks to the potential for ongoing easing by the Fed, the dollar's strength will peak at year-end and gradually weaken by 2025. Ugo Lancioni, head of the currency department at Neuberger Berman, shares a similar view.

This senior portfolio manager based in Milan said: "We hold a small bullish position on the dollar, but as the dollar appreciates, we are reducing our positions. The dollar may enter a consolidation phase, as the market's bulls are already quite numerous."

Latest data from the Commodity Futures Trading Commission (CFTC) confirms this view. Asset managers' current bullish outlook on the dollar is the highest since 2016, highlighting the potential for a dollar decline as investors may cash out from positions benefiting from a stronger dollar.

Fund managers remain extremely bullish on the dollar.

Leah Traub, portfolio manager and head of currency team at Lord Abbett, said: "Some of Trump's trade policies will take some time to show effects. Our cautious point is that the market has acknowledged many of these views."

The ultimate result may be that as investors analyze every headline and economic data point, the volatility of the dollar could increase. The implied volatility index for the Bloomberg Dollar Spot Index over the next six months is at its highest level in 18 months.

The Fed's policy meeting in mid-December will prompt investors to readjust their bets on the dollar, and the policy outcomes from other institutions like the Bank of Japan and the Bank of England will also play a role.

Abdelak Adjriou is one of those preparing for a new round of volatility—especially if the Fed remains on hold this month, catching traders off guard. The currency manager at Carmignac in Paris expects the Fed to cut rates, but prior to that, the U.S. will release employment and inflation data, which could change the situation.

Nevertheless, he chooses to be bearish on short-term fluctuations. He said: "I look at the medium term; the dollar is still king."

Article shared from: Jin Ten Data.