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December has traditionally been the euro’s strongest month, with consistent gains driven by US dollar weakness. However, political instability in Europe, US tariff threats, and global geopolitical tensions may challenge the euro’s usual seasonal rally this year.
ADVERTISEMENTDecember has historically been the strongest month of the year for the euro, with the single currency gaining an average of 1.6% against the U.S. dollar over the past 24 years.
Historical data shows that 71% of the time, the euro ends December in positive territory, more frequently than in any other month.
Yet, as we enter the final month of 2024, a mix of US and European political developments could threaten this well-established pattern.
Why does the euro rally in December?
Among global currencies, the euro stands out as a December winner, consistently capitalising on the US dollar’s seasonal softness.
Over the past seven years, the euro has gained ground every December, extending its streak of December victories.
The next-best month for the euro is April, which sees an average gain of just 0.5% – a third of the December average.
Much of this seasonal strength has less to do with eurozone-specific factors and more to do with US tax regulations.
American corporations typically reduce their dollar holdings at year-end by transferring funds overseas to manage their tax liabilities. This lowers dollar demand in December, indirectly lifting the euro and other major currencies.
However, the seasonal softness of the US dollar is only a temporary phenomenon.
On average, the US Dollar Index – a currency-weighted measure of the greenback’s strength – declines by 0.91% in December but surges by 0.88% in January, as US corporations repatriate funds after year-end tax planning.
This January rebound is the strongest for the dollar across all months.
How other currencies stack up in December?
The seasonal pattern extends beyond the euro, as most major and minor currencies tend to strengthen against the dollar in December. The British pound, for instance, has historically gained an average of 0.4% against the dollar in December, finishing the month in positive territory 58% of the time over the past 40 years.
Similarly, the Australian dollar averages a 0.4% gain during this period, benefiting from improved risk sentiment and seasonal dollar softness.
The Japanese yen also shows modest gains, typically strengthening by 0.3% on average in December, reflecting reduced dollar demand.
Even smaller European currencies like the Hungarian forint, Polish zloty, and Czech koruna exhibit remarkable December performances.
ADVERTISEMENTThe forint gains an average of 0.8%, the zloty strengthens by 1.3%, and the koruna leads with a 1.4% average rise against the dollar.
Risks to December 2024’s euro seasonal pattern
The euro and other currencies may face significant challenges in maintaining their usual December strength this year, as political and economic risks weigh heavily on both sides of the Atlantic.
In 2016, Donald Trump’s unexpected election victory disrupted December’s seasonal currency trends, leading to a 0.67% decline for the euro. A similar dynamic could unfold in 2024, as the threat of sudden tariff announcements resurfaces. Such policy uncertainty may discourage US corporations from transferring dollars overseas, a key driver of December’s dollar weakness in previous years.
Adding to the challenges is heightened political instability in Europe. Germany and France, the eurozone’s two largest economies, are grappling with domestic uncertainties ahead of their 2025 elections. Germany is contending with a fragmented political landscape, while France faces escalating labour strikes and social unrest. These issues could dampen investor confidence in the eurozone, reducing demand for the single currency.
ADVERTISEMENTGeopolitical tensions further complicate the outlook. The ongoing Israel-Hamas conflict, the protracted Russia-Ukraine war, and concerns over China’s fragile economic recovery are likely to bolster the US dollar as a global safe haven, limiting its typical seasonal weakness in December.
This unique confluence of risks casts doubt on whether the euro – and other major currencies – can replicate their historically strong December performances in 2024.
