AI worries expose dollar's hot-money problem
SPY•Record foreign flows into US equities have made the dollar more exposed to price-sensitive investors, analysts say. If the AI trade unwinds, weaker growth, lower rates and fading demand for US assets could undermine the currency, though a scramble for dollar funding could initially strengthen it.
1. Foreign flows raise exposure
Foreign capital has poured into US mega-cap equities, hyperscaler corporate bonds and power-grid infrastructure, while foreign direct investment has lagged. Analysts say this leaves the dollar increasingly reliant on institutional allocators who may reassess US growth, rates and technology valuations. When AI valuations came under pressure last week, haven flows favored the yen and Swiss franc over the dollar.
2. Potential pressure points
Analysts say an AI-trade unwind could hit equities, credit and rates. Weaker growth could prompt Federal Reserve rate cuts and erode the dollar’s yield advantage, while slower investment and reduced institutional demand could weaken support for US assets. Investors have continued to buy dips, and one strategist said sustained weakness could take months or years to develop.
3. Credit stress and dollar risks
Strategists said an equity rout alone would not automatically sink the dollar, pointing to its strength for nearly two years after the Nasdaq peaked in March 2000. They highlighted concentrated foreign investment in equities and corporate bonds, weaker foreign direct investment and stress in credit default swaps for heavily indebted neocloud companies including CoreWeave. A severe shock could still prompt a temporary rush for dollar funding, as occurred in 2008 and March 2020.
