Key facts
- Foreign capital chasing AI boom returns could weaken dollar's safe-haven status.
- AI trade unwind could hit equities, credit, and rates, leaving dollar vulnerable.
- Dollar's real trade-weighted value has stayed above its long-run average for 12 years.
- US fiscal deficit limits room for stimulus without unsettling debt markets.
Investors have traditionally viewed the US dollar as a safe haven during market downturns. However, the influx of foreign capital seeking returns from the artificial intelligence boom could undermine this status. If the AI trade unwinds, the dollar's safe-haven appeal might be overshadowed by its role as a risk-sensitive asset, potentially leading to significant selling pressure.
Last week's market movements, where the yen and franc gained as AI valuations faced pressure, offered an early warning. Analysts note that the concentration of capital in US equities and corporate bonds, rather than direct investment, makes these flows susceptible to reassessments of US growth, rates, or tech valuations.
Concerns about the AI sector's creditworthiness, coupled with Washington's large fiscal deficit, add to the dollar's potential vulnerability. A US-specific credit and growth problem could alter Federal Reserve policy expectations, potentially strengthening the yen at the dollar's expense.