FOREX-Dollar heads for weekly fall as investors gauge AI selloff impact

The dollar was on track for ‌its ​first weekly decline in more than a month against the euro and the yen, as investors shifted their focus to the US rate outlook while assessing the impact of Wednesday's stock market selloff. AI stocks have cratered this week and the stress 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. The Swiss franc 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 0.85% weekly rise versus the dollar, after rising over 1.4% in the last ‌two sessions.

The dollar index, which measures the US currency against six major peers, fell 0.35% to 101.70 and was set for a 0.55% 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 sell-off in tech stocks. US stock futures were mixed after the S&P 500 ended higher on Thursday 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 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% probability to the Federal Reserve keeping rates unchanged later this month, according to CME FedWatch Tool.

"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.

EURO AREA FISCAL RISKS STILL IN FOCUS Fiscal risks in France remained in the background after the jump in the French debt risk premium in early October.

"Forex option-implied volatility skew reflects ⁠that ​the market has positioned for further euro weakness and is particularly pronounced for the euro/dollar, the euro/Swiss franc and the euro/yen," Claudio Wewel, forex strategist at J. Safra Sarasin, said. The euro was up 0.33% to $1.1258 after climbing 0.56% on Thursday in its biggest daily rise in two months. It was on track for a 0.51% weekly gain.

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 by fuelling inflation. The yen was on track for a 0.24% weekly rise after dropping for four consecutive ⁠weeks as the Iran conflict supported the greenback. It ⁠was last up 0.05% at 157.89.

Higher oil prices tend to boost 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 by around 0.30% a week as monetary tightening rhetoric by Japan's authorities supported the ‌yen.

Bank of Japan Governor Kazuo ‌Ueda on Friday reiterated the risks of underlying inflation overshooting the central bank's 2% target.