The dollar headed for its first weekly fall in five weeks on Friday as AI investment wobbles hit the market. Spectra Markets president Brent Donnelly said, "The entire US economy is a one-legged stool balanced on the AI trade." This shift helped the euro recover from a 17-month low.
The dollar headed for its first weekly fall in five weeks on Friday, lifting the euro from a 17-month low as wobbles in AI investment and drop in US yields put the brakes on recent gains.
AI stocks have cratered this week and the stress 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.
The result, so far, has been a flight to Treasuries, where the US 10-year yield is set for its largest weekly fall in more than a year, and to sell a dollar which has been propelled, in part, thanks to the AI boom boosting the economy.
Moves in the Asia morning were slight, leaving the dollar down 0.2% this week at 158.13 yen and shedding about 0.1% to $1.1210 per euro. 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.
With the market positioned long in dollars, more AI wobbles could unwind that and push the dollar down further.
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"The reaction function of the dollar to a serious repricing of the AI capex boom should be unambiguously dollar bearish," said Spectra Markets president Brent Donnelly.
"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 measures the US currency against six major peers, was at 102.07, set for a 0.14% drop in the week.
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.
The Australian dollar was flat at $0.6921 and an outlier in heading for a fall of 0.8% on the dollar this week, after a surprisingly soft jobs report on Thursday had markets paring back expectations for another rise in interest rates.
Federal Reserve Chair Kevin Warsh speaks in Bangkok on Friday at 0330 GMT (11:30 p.m. ET Thursday) at the International Monetary Fund's annual meeting, a final chance to shape market expectations for the Fed's decision in less than two weeks.
"Given Warsh's distaste for forward guidance, he might subtly signal his preference for the October rate outcome," said Carol Kong, currency strategist at Commonwealth Bank of Australia. "Any hints from Warsh can influence the October Fed pricing and the USD sharply today."
Traders are pricing in a 72% chance of the Fed standing pat later this month, up from 53% a month earlier, the CME FedWatch tool showed.
The expected likelihood of a hike rose sharply after a hotter-than-expected CPI report this week, but bets eased after Fed officials said the central bank could wait for more clarity before the meeting.
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