The month of December is always an important one for the forex market. With the end of the year approaching, traders start to review their portfolios and make last-minute adjustments to their positions. Additionally, the holiday season typically leads to lower trading volumes, which can create increased volatility and unexpected price movements. In this article, we will take a closer look at what happened in the forex market in December 2020.
US Dollar Weakness
One of the most significant trends in the forex market in December was the continued weakness of the US dollar. The US dollar index, which measures the value of the dollar against a basket of other major currencies, fell to its lowest level since April 2018. There were several factors that contributed to this weakness.
First, the ongoing COVID-19 pandemic continued to weigh on the US economy. Despite the rollout of vaccines, the number of cases and deaths in the US continued to rise, leading to renewed lockdowns and restrictions in many parts of the country. This dampened investor sentiment and led to a flight to safety away from the dollar.
Second, the Federal Reserve announced that it would keep interest rates near zero for the foreseeable future and would continue its bond-buying program. This policy stance is designed to support the US economy, but it also puts downward pressure on the dollar by making it less attractive for investors seeking higher yields.
Finally, the political situation in the US remained uncertain, with President Trump continuing to dispute the results of the November election. This added to the overall sense of instability and weakened the dollar further.
Euro Strength
While the dollar was weakening, the euro was strengthening. The euro rose to its highest level against the dollar since April 2018, driven by several factors.
First, the European Union reached an agreement on a historic €750 billion recovery fund to help member states recover from the economic damage caused by the pandemic. This agreement was seen as a positive sign for the future of the EU and boosted investor confidence in the euro.
Second, the European Central Bank announced that it would expand its bond-buying program by €500 billion, bringing the total size of the program to €1.85 trillion. This move was designed to provide additional support to the eurozone economy and limit the damage caused by the pandemic.
Finally, the Brexit negotiations between the UK and the EU reached a conclusion, with a last-minute agreement reached on December 24th. This removed a major source of uncertainty for the eurozone and provided a boost to the euro.
Other Developments
In addition to the trends discussed above, there were several other developments in the forex market in December worth noting.
First, the Chinese yuan continued to strengthen against the dollar, reaching its highest level in more than two years. This was driven by China’s strong economic recovery from the pandemic and increased investor interest in Chinese assets.
Second, the Canadian dollar and the Australian dollar both rose against the dollar, driven by higher commodity prices. Both Canada and Australia are major exporters of commodities such as oil and iron ore, and higher prices for these commodities can boost their respective currencies.
Finally, the Japanese yen remained relatively stable against the dollar, despite the overall weakness of the dollar. This was due in part to the Bank of Japan’s policy of keeping interest rates near zero and its ongoing bond-buying program.
Conclusion
Overall, December was a month of significant developments in the forex market. The continued weakness of the US dollar, the strength of the euro, and the rise of the Chinese yuan were among the most notable trends. While the pandemic and political uncertainty in the US continue to create uncertainty, there are reasons for optimism as vaccines are rolled out and stimulus measures are put in place. As always, traders will need to stay vigilant and adapt to changing market conditions in order to succeed in the forex market.
