Euro gets much-needed reprieve as AI wobbles rock the dollar

Over the past five weeks, the euro has declined more than 3% against the dollar due to concerns over France's increasing debt and a winter energy crisis. On Friday, the dollar experienced its first weekly drop in five weeks, resulting in the euro reaching a 17-month low. This reversal was prompted by AI investment wobbles and a decline in US yields, which curbed recent gains.

AI stocks have plummeted this week, causing investors to worry about data center operators' profitability and the potential difficulty in repaying debts. Consequently, investors have been flocking to US Treasuries, causing the 10-year yield to register its largest weekly drop in over a year, and selling the dollar. The dollar has weakened by 0.2% this week, trading at 158.13 yen and losing about 0.1% to $1.1210 per euro.

Spectra Markets president Brent Donnelly noted that a significant reassessment of AI capex spending could lead to a further decline in the dollar. He stated that if the market is pricing rising odds of peak AI capex, the USD is a sell. The US economy is heavily dependent on the AI trade, making the dollar vulnerable to any shifts in AI investment sentiment.

Meanwhile, the British pound remained steady at $1.3270, up 0.3% for the week, following data indicating an unexpected economic growth of 0.1% in August. Conversely, the New Zealand dollar is anticipated to make a modest weekly gain of 0.1% at $0.5621, while the Australian dollar is expected to hold steady at $0.6921, having experienced a slight 0.8% drop against the dollar this week.

This decline occurred after a surprisingly weak jobs report on Thursday prompted traders to lower expectations for another interest rate hike. Federal Reserve Chair Kevin Warsh is set to address the International Monetary Fund's annual meeting in Bangkok on Friday, providing a final opportunity to influence market expectations for the Fed's decision in the coming days.