The US Dollar is headed for its first weekly decline in five weeks, falling 0.2% this week at 158.13 yen and shedding about 0.1% to $1.1210 per euro as artificial intelligence-related concerns fueled a bond rally that pushed yields lower and weighed on the currency. According to The Economic Times, the dollar index, which measures the US currency against six major peers, was at 102.07, set for a 0.14% drop in the week. The slide came despite new economic data pointing to ongoing inflation pressures, with US producer prices advancing 1.3% in September, the most in more than four years, according to the Bureau of Labor Statistics data released Thursday. As Andrew Hazlett, a foreign-exchange trader at Monex Inc, noted, "As AI debt has sold off, there has been a flight to safer assets like Treasuries, which is pushing down yields, which is pressuring the dollar."
The euro has rebounded from a 17-month low as wobbles in AI investment and drop in US yields put the brakes on recent dollar gains. According to The Economic Times, the reversal has come not a moment too soon for the common currency, which over the previous five weeks had dropped more than 3% on the dollar on jitters about France's growing debt pile and a winter energy squeeze. Sterling was steady at $1.3270 for a weekly rise of 0.3%, helped by data showing Britain's economy unexpectedly grew 0.1% in August. The New Zealand dollar looked likely to scratch out a weekly gain of 0.1% at $0.5621, while the Australian dollar was flat at $0.6921 and heading for a fall of 0.8% after a surprisingly soft jobs report on Thursday had markets paring back expectations for another rise in interest rates.
Fresh inflation data added to the uncertainty surrounding the outlook for US equities, with producer prices rising 1.3% month over month in September and 6.3% from a year earlier, according to the latest data. Both readings came in well above economists' expectations of 0.6% and 5.5% respectively, with the increases representing the largest monthly and annual gains since 2022. The figures followed a hotter-than-expected consumer price reading on Wednesday, strengthening concerns that inflationary pressures remain persistent. Federal Reserve Chair Kevin Warsh offered no clues about future rate decisions at the IMF-World Bank annual meetings in Bangkok on Friday, saying he does not "prejudge meetings." As John Velis, Americas macro strategist at BNY, noted, "I don't think there is enough support in (the) committee, particularly from the governors, for a rate hike in October." Markets now assign an 83% probability to the Fed keeping rates unchanged later this month, up from 49% a month earlier, according to the CME FedWatch Tool.
AI stocks have cratered this week and the stress has spread to parts of the credit market as investors who have crowded in to bets all along the AI supply chain worry that data centre operators might not manage to be profitable in time to pay their debts. According to The Economic Times, the result has been a flight to Treasuries, where the US 10-year yield is set for its largest weekly fall in more than a year. The weakness followed a sharp sell-off in South Korea, where the Kospi index plunged more than 7% overnight. The semiconductor sector's struggles reflect broader concerns about the sustainability of AI infrastructure spending and its impact on chipmaker valuations, with Micron Technology falling around 4%, Advanced Micro Devices dropping 5%, and *SanDisk declining 6%**. Matt Weller, global head of market research at StoneX, noted that "Usually if we see a sell off in tech stocks you would expect the greenback to get a safe-haven bid. We are seeing an element of that into bonds, but the dollar is actually falling."
With the market positioned long in dollars, more AI wobbles could unwind that position and push the dollar down further. As Brent Donnelly, president of Spectra Markets, noted, "The reaction function of the dollar to a serious repricing of the AI capex boom should be unambiguously dollar bearish. If the market is pricing rising odds of peak AI capex, the USD is a sell. The entire US economy is a one-legged stool balanced on the AI trade." The Economic Times reports that traders are pricing in a 72% chance of the Fed standing pat later this month, up from 53% a month earlier, with the expected likelihood of a hike rising sharply after a hotter-than-expected CPI report this week, but bets easing after Fed officials said the central bank could wait for more clarity before the meeting. The dollar index fell 0.17% to 101.87 and was set for a 0.35% weekly drop, with the pound and Swiss franc leading gains against the dollar this week.
