Dollar heads for weekly fall as investors gauge AI selloff impact

Oct 16 : The US dollar was set for its first weekly fall in more than a month against the euro and the yen, as investors turned their focus to the US rate outlook while concerns about an escalation of the Iran conflict faded.

AI stocks have cratered this week and the stress has spread to parts of the credit market as investors who have crowded into bets all along the AI supply chain worry data centre operators might not manage to be profitable in time to pay their debts. 

Analysts noted that Wednesday's market moves may provide a preview of how currencies would react to a major AI-driven selloff, with the dollar falling instead of attracting safe-haven demand as investors shift towards a more dovish view of the Federal Reserve policy path.

The Swiss franc again looks set to be the biggest beneficiary, thanks to its safe-haven status and expectations that, even in a lower-rates environment, Switzerland is unlikely to cut policy rates below the current zero level. It was set for a 0.61 per cent weekly rise versus the dollar.

The dollar index, which measures the US currency against six major peers, fell 0.25 per cent to 101.77 and was set for a 0.45 per cent weekly decline. It rose in two of the week's five sessions, including on Wednesday, as the boost from hotter-than-expected inflation data more than offset the drag from a selloff in tech stocks.

The S&P 500 ended higher on Thursday, springing back from early losses as investors concerned about AI stocks shifted into healthcare and consumer stocks. 

Wednesday’s “action revealed exactly what could threaten the US dollar and bring US yields lower in the next few months and in 2027: a reduction in the outlook for AI investment,” Thierry Wizman, global forex and rates strategist at Macquarie Group, said.

“That's because it would reduce bond supply and impair US growth, all else equal,” he added.

US RATES IN FOCUS

US Treasury yields dropped earlier this week despite hot inflation readings as cautious remarks from Federal Reserve officials tempered October hike expectations.

Markets assign an 87 per cent probability to the Federal Reserve keeping rates unchanged later this month, according to the CME FedWatch Tool.

Investors expect US President Donald Trump to steer clear of any escalation in the Middle East or Ukraine, as a broader conflict could hurt his standing ahead of the midterm elections fuelling inflation and possibly hurting the economy.

The euro was up 0.14 per cent to $1.1235 after climbing 0.56 per cent on Thursday in its biggest daily rise in two months. It was on track for a 0.39 per cent weekly gain.

"Barring another big leg down in AI stocks and risk assets in general, expect the dollar to consolidate near recent highs," said Chris Turner, forex strategist at ING.

"It is only when short-end rates break lower that the dollar is ready to drop. And we are not there yet," he added.

The yen was on track for a 0.28 per cent weekly rise after dropping for four consecutive weeks as the Iran conflict supported the greenback. It was last up 0.05 per cent at 157.89.

Higher oil prices tend to support the dollar while weighing on energy-importing currencies such as the euro and yen.

The Japanese currency tumbled in mid-September after a disappointing Bank of Japan policy meeting, but subsequently fell by around 0.30 per cent a week as monetary tightening rhetoric by Japan's authorities supported the yen.

Bank of Japan Governor Kazuo Ueda said on Friday that the BoJ would continue to raise policy rates in line with economic and financial developments. 

The Australian dollar rose 0.55 per cent to $0.6959 but was an outlier in heading for a fall of 0.3 per cent on the dollar this week, after a surprisingly soft jobs report on Thursday had markets paring back expectations for another rise in interest rates.