Here’s why BofA is eyeing a "long December ahead" for the U.S. dollar

Investing.com - The implications of several potentially market-moving factors in the remaining weeks of the year on the U.S. dollar may vary, but the greenback faces more weakening in 2026, according to analysts at BofA Securities.

In a note, the strategists including Alex Cohen and Adarsh Sinha flagged that "there will be a lot" for investors to digest in the few short weeks before the Christmas holidays bring 2025 to a close.

"It is looking to be a long December for markets, and there’s reason to believe the high concentration of event risk could shape the near-term outlook for the U.S. dollar," the BofA analysts said.

Traders will be keeping close tabs on volatility in artificial intelligence stocks, despite an easing in some fears over the sustainability of frothy tech sector valuations and soaring spending on AI infrastructure in late November, the analysts said.

While the dollar has been showing slightly more signs of tracking daily movements in AI stocks, on a weekly basis, the greenback has tended to move in an opposite direction to these equities, the analysts flagged. Ultimately, they described the correlation between the two as "inconclusive."

They added that the Federal Reserve’s upcoming interest rate decision on December will be in focus. Bets that the Fed will slash rates by 25 basis points at the conclusion of its December 9-10 meeting have increased. CME FedWatch has shown a roughly 87% chance this reduction will occur, up from around 40% a little over a week ago.

Recent economic data has pointed to a weakening jobs market in the U.S., bolstering expectations that the Fed will bring down borrowing costs to support hiring and investment.

The U.S. unemployment rate in September climbed to its highest level in almost four years, while a survey of consumer confidence fell to its lowest point since April. A Fed report also suggested a slight decrease in employment, with more of the central bank’s districts flagging freezes.

Many economic indicators for October and November have also not been published because of a record-long federal government shutdown which ended last month.

Meanwhile, media reports have suggested that White House economic adviser Kevin Hassett is the frontrunner to succeed Powell when his term ends in May. Notably, Hassett is a close ally of President Donald Trump, who has long badgered the Fed to aggressively and quickly slash interest rates to help boost the economy.

"We see upside U.S. dollar risks going into the meeting, though [...] greater FX sensitivity is likely to come from data and the next Fed Chair," the BofA analysts said.

A "more dovish Fed over time feels inevitable," they argued, adding that any positive outcomes for the U.S. dollar would be "short-lived" and "dollar negative outcomes could have a way to run."

Elsewhere, the U.S. Supreme Court may deliver a ruling on Trump’s ability to employ emergency economic powers to impose sweeping tariffs, a centerpiece of his economic policy.

Should the high court rule against Trump and order revenues from the tariffs to be returned, this "would create renewed pressure/focus" on the U.S. fiscal position, increasing the risk premium investors demand for holding longer-term bonds rather than rolling over short-term debt. The U.S. dollar may tick lower as a result, the analysts said.

Overall, the Supreme Court verdict skews "negative" for the U.S. dollar, "albeit with a high degree of uncertainty," they added.