Why the December seasonal growth of the euro could be at risk this year?!
December has historically been the strongest month of the year for the euro , with the common currency gaining an average of 1.6% against the US dollar over the past 24 years. Historical data shows that in 71% of cases, the euro ends December in positive territory, more often than in any other month.
However, as we enter the final month of 2024, a mix of US and European political developments could threaten this well-established pattern. Among global currencies, the euro stands out as December's winner, consistently capitalizing on the US dollar's seasonal softness.
Over the past seven years, the euro has gained ground every December, extending its December winning streak. The next best month for the euro is April, which sees an average gain of just 0.5%, a third of December's average. Much of this seasonal strength has less to do with specific eurozone factors and more to do with US tax regulations.
US corporations typically reduce their dollar holdings at the end of the year by moving funds overseas to manage their tax liabilities. This lowers demand for dollars 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, fell 0.91% in December but rose 0.88% in January as US corporations repatriated funds after year-end tax planning. This January rally is the dollar's strongest all month.
How do other currencies rise 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 example, has historically gained an average of 0.4% against the dollar in December, ending the month in positive territory 58% of the time over the past 40 years.
Similarly, the Australian dollar averaged a gain of 0.4% over the period, benefiting from improved risk sentiment and the greenback's seasonal softness. The Japanese yen is also showing modest gains, typically strengthening by 0.3% on average in December, reflecting reduced demand for dollars.
Even smaller European currencies such as the Hungarian forint, Polish zloty and Czech koruna are putting in outstanding December performances. The forint gains an average of 0.8%, the zloty strengthens by 1.3%, and the koruna leads with an average increase of 1.4% against the dollar.
Risk to December 2024 Euro Seasonal Pattern
The euro and other currencies may face significant challenges to maintain their usual December strength this year, as political and economic risks weigh heavily on both sides of the Atlantic. In 2016, Donald Trump's surprise 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 surprise tariff announcements re-emerges. Such policy uncertainty could discourage US corporations from moving dollars overseas, a key driver of December dollar weakness in previous years.
Adding to the challenges is the increase in political instability in Europe. Germany and France, the eurozone's two largest economies, are grappling with domestic uncertainties ahead of their elections in 2025. Germany is struggling with a fragmented political landscape, while France faces escalating labor strikes and social unrest. These issues could dampen investor confidence in the eurozone, reducing demand for the common currency.
Geopolitical tensions further complicate the outlook. The ongoing Israel-Hamas conflict, the protracted Russia-Ukraine war and concerns about China's fragile economic recovery are likely to strengthen 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 repeat their historically strong December performances in 2024.
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