Dollar weekly slide eases pressure on euro as AI-driven market stress hits U.S. yields

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Dollar eases, euro rises

Highlights

The dollar is heading for its first weekly fall in five weeks, dropping 0.2% to 158.13 yen and 0.1% to $1.1210 per euro, amid AI-related market stress.
The U.S. 10-year Treasury yield is on track for its largest weekly drop in over a year, reducing a key support for the dollar as investors flee to safe havens.
Fed rate hike expectations have eased, with traders pricing a 72% chance of rates staying unchanged this month versus 53% a month ago, after dovish Fed comments.

AI selloff reshapes currency positioning

As reported by Reuters, the dollar is heading for its first weekly fall in five weeks on Friday, with the euro recovering from a 17-month low as stress linked to AI investment spreads through equity and credit markets.

AI stocks have cratered this week as investors question whether data centre operators will become profitable quickly enough to service debt taken on across the AI supply chain. That has fuelled a flight to Treasuries, leaving the U.S. 10-year yield on track for its biggest weekly drop in more than a year and reducing one of the recent supports for the dollar.

In Asia morning trading, moves are limited, but the dollar is down 0.2% for the week at 158.13 yen and is shedding about 0.1% to $1.1210 per euro. The common currency had fallen more than 3% against the dollar over the previous five weeks, pressured by concerns over France's debt burden and a winter energy squeeze.

Brent Donnelly, president of Spectra Markets, says a serious repricing of the AI capital spending boom would be clearly bearish for the dollar. He says that if markets increasingly price in peak AI capital expenditure, the U.S. currency is likely to come under further selling pressure.

Fed signals and regional currencies in focus

Sterling is steady at $1.3270 and is set for a weekly rise of 0.3%, supported by data showing Britain's economy unexpectedly grew 0.1% in August. The New Zealand dollar is also on course for a modest weekly gain of 0.1% at $0.5621, while the Australian dollar is flat at $0.6921 but remains an outlier, heading for a weekly decline of 0.8% after a soft jobs report led markets to scale back expectations for another interest rate increase.

The dollar index, which tracks the U.S. currency against six major peers, stands at 102.07 and is set for a weekly drop of 0.14%. With markets already positioned long on the dollar, further instability around AI-related investments could trigger a deeper unwind.

Attention is also on Federal Reserve Chair Kevin Warsh, who is due to speak in Bangkok at the International Monetary Fund's annual meeting. Carol Kong, a currency strategist at Commonwealth Bank of Australia, says any signal from Warsh could sharply influence pricing for the Fed's October decision and move the U.S. dollar.

Traders are pricing a 72% chance that the Fed leaves rates unchanged later this month, according to the CME FedWatch tool, up from 53% a month earlier. Expectations for a rate increase had risen after a hotter-than-expected CPI report this week, but those bets have eased after Fed officials indicated the central bank could wait for more clarity before the meeting.

In our earlier article on the AI-linked tech selloff, we explained how hotter-than-expected inflation data pushed investors to reassess the rising cost of financing heavy AI spending. We also highlighted pressure on AI infrastructure and chip-related names such as CoreWeave and Oracle, alongside growing expectations for further Fed tightening as bond yields climbed.

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