Dollar Retreats as AI Market Volatility Triggers Global Currency Shift
The US dollar faces its first weekly decline in five weeks as AI stock instability and falling Treasury yields provide a reprieve for the struggling euro.
POLICY WIRE — Singapore, Singapore — The U.S. dollar is on track for its first weekly decline in five weeks, providing a vital boost to the euro as it recovers from a 17-month low. This shift follows a period of instability in artificial intelligence investments and a notable drop in U.S. Treasury yields, which have collectively stalled the dollar’s recent momentum.
Market anxiety has intensified this week as AI-related stocks plummeted, creating ripple effects across credit markets. Investors are increasingly concerned that data center operators may struggle to achieve profitability quickly enough to service their existing debt obligations.
This uncertainty has triggered a flight to safety, driving demand for Treasuries and causing the U.S. 10-year yield to head toward its largest weekly decline in over a year. The dollar, which had previously benefited from the economic optimism surrounding the AI boom, is now facing a significant sell-off.
In early Asian trading, the dollar slipped 0.2% for the week to 158.13 yen and dropped roughly 0.1% against the euro to $1.1210. This reversal offers relief to the common currency, which had fallen more than 3% against the dollar over the previous five weeks due to fears regarding France’s rising debt and potential energy shortages this winter.
Spectra Markets president Brent Donnelly noted the potential for further declines, stating, The reaction function of the dollar to a serious repricing of the AI capex boom should be unambiguously dollar bearish. He added, “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 dollar index, which tracks the greenback against six major currencies, sat at 102.07, marking a 0.14% weekly decline. Meanwhile, the British pound remained steady at $1.3270 following data showing an unexpected 0.1% growth in the U.K. economy during August, while the New Zealand dollar hovered near a 0.1% weekly gain at $0.5621.
The Australian dollar remained flat at $0.6921, standing out as an outlier with an 0.8% weekly loss following a soft jobs report that led markets to scale back expectations for future interest rate hikes. Attention now turns to Federal Reserve Chair Kevin Warsh, who is scheduled to speak in Bangkok at the International Monetary Fund’s annual meeting.
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, suggested that the speech could be pivotal, noting, Given Warsh’s distaste for forward guidance, he might subtly signal his preference for the October rate outcome. Any hints from Warsh can influence the October Fed pricing and the USD sharply today.
Current CME FedWatch data indicates a 72% probability that the Federal Reserve will maintain current interest rates later this month, an increase from 53% just one month ago. While expectations for a hike had spiked following a hotter-than-expected CPI report, those bets have since moderated as officials signaled a preference for further clarity.
Reporting by Policy-Wire (PW)
