The US dollar weakened on Friday, heading toward its first weekly decline in more than a month against the euro and Japanese yen. Falling expectations of another Federal Reserve interest-rate hike and growing concerns about artificial intelligence stocks weighed on the American currency.
Stronger-than-expected US consumer and producer inflation figures initially unsettled financial markets earlier in the week. However, comments from Federal Reserve officials suggested little urgency to raise borrowing costs further.
As a result, Treasury yields stabilized, while demand for the dollar weakened as investors reassessed the outlook for US monetary policy.
US Dollar Weakens as AI Stock Market Concerns Intensify
The recent decline in artificial intelligence-related stocks has created additional uncertainty across global financial markets.
Technology shares experienced substantial selling pressure during the week, while concerns also spread into segments of the credit market.
Investors have become increasingly cautious about companies involved in the AI infrastructure boom, particularly data center operators facing significant financing requirements.
Some market participants fear that these businesses may struggle to generate sufficient profits to service their debts, potentially creating broader financial risks.
Matt Weller, global head of market research at StoneX, highlighted the unusual relationship between the dollar and AI-related investments.
According to Weller, the American currency has become increasingly sensitive to movements in technology stocks.
Traditionally, sharp declines in equities tend to increase demand for the US dollar as a safe-haven asset. However, the latest market turbulence has produced a different reaction.
While investors have shown renewed interest in government bonds, the dollar has continued to weaken alongside technology stocks.
US Dollar Index Heads for Weekly Decline
The US Dollar Index (DXY), which measures the greenback against a basket of six major currencies, declined 0.17% to 101.87.
The index was also on track to record a weekly loss of approximately 0.35%, reflecting a broader retreat in the American currency.
The British pound and Swiss franc emerged as two of the strongest performers against the dollar during the week.
Sterling advanced 0.31% to $1.3314, bringing its weekly gain to approximately 0.63%.
Meanwhile, the dollar declined 0.25% against the Swiss franc to 0.8246, extending its weekly loss to 0.67%.
The Swiss currency gained more than 1.4% over the previous two trading sessions, supported by increased safe-haven demand.
Investors also expect the Swiss National Bank to avoid reducing its policy rate below the current zero level, even if global monetary conditions become more accommodative.
Federal Reserve Rate Hike Expectations Decline Sharply
Changing expectations for Federal Reserve policy have played a major role in the dollar’s recent weakness.
According to CME Group’s FedWatch Tool, financial markets assigned an 83% probability to the Fed leaving interest rates unchanged at its October meeting.
That represents a significant shift from one month earlier, when the probability stood at just 49%.
Speaking during the IMF-World Bank annual meetings, Federal Reserve Chair Kevin Warsh avoided providing specific guidance about upcoming monetary policy decisions.
Instead, he emphasized that policymakers would evaluate conditions at each meeting rather than commit to future decisions in advance.
The comments reinforced expectations that the Federal Reserve may have limited appetite for another immediate rate increase.
John Velis, Americas macro strategist at BNY, suggested that support for an October rate hike appeared insufficient among Federal Reserve policymakers.
However, he noted that the December meeting remained uncertain, with upcoming economic developments likely to influence the final decision.
What Could Change the Fed’s December Interest Rate Outlook?
Several economic indicators could reshape market expectations ahead of the Federal Reserve’s December policy meeting.
Further increases in consumer or producer inflation could strengthen arguments for maintaining restrictive monetary conditions.
Persistent energy price pressures could also complicate the inflation outlook, particularly if geopolitical tensions disrupt global oil supplies.
Meanwhile, stronger employment figures, resilient consumer spending, and accelerating economic growth could encourage policymakers to reconsider additional tightening.
Conversely, weaker labor market conditions or renewed financial instability could reduce the likelihood of another rate increase.
The performance of technology stocks and credit markets may also influence financial conditions, adding another consideration for Federal Reserve officials.
Euro Gains Against Dollar Despite French Fiscal Concerns
The euro strengthened against the US dollar, supported by the greenback’s broader retreat.
EUR/USD climbed 0.08% to $1.1227 after advancing 0.56% on Thursday, marking its strongest daily increase in approximately two months.
The European currency was on course for a weekly gain of 0.23%.
Nevertheless, investors continued monitoring fiscal developments in France, where concerns about government finances had pushed the country’s debt risk premium higher earlier in October.
These risks remained an important consideration for the euro area’s financial outlook.
Geopolitical developments also influenced currency market sentiment.
Investors were assessing the possibility that US President Donald Trump could avoid further escalation in the Middle East and Ukraine ahead of the US midterm elections.
A broader conflict could increase energy prices and inflationary pressures, potentially creating additional economic and political challenges.
Japanese Yen Recovers After Four Weeks of Losses
The Japanese yen also strengthened against the dollar, ending a prolonged period of weakness.
USD/JPY declined 0.08% to 158.11, putting the Japanese currency on track for a weekly advance of approximately 0.13%.
The recovery followed four consecutive weeks of losses, during which geopolitical tensions and elevated energy prices had supported the greenback.
Japan’s dependence on imported energy makes the yen particularly sensitive to sharp increases in oil prices.
Higher crude costs can increase import expenses and place additional pressure on the country’s trade balance.
Meanwhile, Bank of Japan Governor Kazuo Ueda reiterated concerns that underlying inflation could exceed the central bank’s 2% target.
His remarks highlighted the challenges facing Japanese monetary policymakers as they balance inflation risks against broader economic conditions.
What Comes Next for the US Dollar?
The dollar’s near-term direction will likely depend on Federal Reserve expectations, inflation data, and developments across global financial markets.
A continued decline in the probability of further interest-rate hikes could maintain downward pressure on the greenback.
However, unexpectedly strong economic data or renewed inflation concerns could revive expectations of tighter monetary policy and support a dollar recovery.
The performance of artificial intelligence stocks also remains an important factor to watch.
If technology-sector weakness spreads further into credit markets, investors may become increasingly cautious about exposure to US financial assets.
At the same time, escalating geopolitical tensions or another rise in energy prices could strengthen demand for traditional safe-haven investments.
For now, the US dollar remains on course for a weekly decline, with fading Fed rate-hike expectations and persistent AI market concerns shaping investor sentiment.
Upcoming inflation releases, central bank statements, and global equity market performance will be crucial in determining whether the dollar’s recent weakness continues.
