The euro has a great seasonal tendency in the month of December. In fact, over the last 24 years, it has appreciated an average of 1.6% annually against the U.S. dollar. Across Europe, this has been a month of euro highs. It’s closed in the green 71% of those months, making it the best month this year by any measure. Yet this December could be the month when challenges conspire to bring the euro’s unusual rise of more than a decade to an abrupt end.
The euro has appreciated for the last seven Decembers in a row. This trend has even established a tendency to be the strongest month for the currency. This seasonal strength has previously been explained by U.S. tax rules, not eurozone factors. As U.S. corporations go into the end of the year, they usually try to reduce their dollar balances. They accomplish this by shifting money abroad to avoid paying taxes. This practice has the unfortunate effect of pushing up the euro, since demand swells for European currencies.
Historical Context of Euro Performance
December’s reputation as a strong month for the euro is longstanding and well-established. In comparison to other months, April ranks as the euro’s next-best performer, but it only sees an average gain of 0.5%—a mere third of December’s robust average. The euro has been astounding strength over this period. Such resilience shoulders the positioning of European markets and the euro favorably against comparable markets and currencies like the USD.
In addition, currencies from other minor European countries, like the euro member states, have exhibited the same trends. For December, the Hungarian forint has an average increase of 0.8%. At the same time, the Polish zloty appreciates by 1.3%, and the Czech koruna heads to the front with 1.4% average appreciation against the dollar. European currencies are having an excellent month on the whole. This serves to underscore the euro’s importance in the global currency market.
Potential Disruptors to Euro’s Seasonal Rally
Given its dismal long-term track record, 9 reasons threaten the euro’s advance this coming December. Rising global tensions and a shaky economy may pump further primacy into the U.S. dollar as the preeminent safe-haven currency. This could help offset the typical seasonal dollar weakness seen each year in December. These conditions could create a more risk averse environment among investors, which would decrease the strength of the euro.
Neither should the impact of unforeseen political developments be discounted. Then in December 2016, things previously taken for granted were turned upside down by Donald Trump’s election surprise. The implication of this announcement was such that the euro should plummet, down 0.67%. This is a clear indicator of how unpredictable events can drastically affect currency performances, cutting both ways and making it hard to say anything for sure.
Broader Implications for Currency Markets
With December fast approaching, analysts are looking deeply at the most recent developments. They plan to measure what these events might mean for the euro and other major currencies. In December, the U.S. Dollar Index tends to decline on average of 0.91%. This seasonal dollar softness has played into the hands of the euro and other dollar-alternatives historically.
Historically, the euro has had a great run in December. The global landscape is increasingly shifting in ways that pose substantial new challenges that may prevent it from maximizing these seasonal opportunities. Investors and market watchers alike will have to remain on their toes as they look to navigate these complexities this December and thereafter.
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