AI worries expose dollar's hot-money problem

Investors have increasingly viewed the U.S. dollar as a safe-haven asset during market downturns, but the surge in foreign capital chasing returns from the AI boom may weaken this role if the AI narrative falters. As foreign money pours into U.S. mega-cap equities, hyperscaler corporate bonds, and power-grid infrastructure, the dollar has become a risk-sensitive asset held by price-sensitive investors.

If the AI trade unravels, investors could sell US assets, potentially overwhelming the safe-haven demand for the currency. Dominic Bunning, head of G10 FX strategy at Nomura, notes that if the AI trade stumbles, the dollar's safe-haven status might clash with its role as a risk-sensitive asset. Kevin Ford, lead FX and macro strategist at Convera, highlights the growing visibility of the relationship between AI trade and the dollar when AI valuations face pressure.

Erik Nelson, global head of FX strategy at Wells Fargo, likens these allocations to "hot money" flows in emerging markets, suggesting that a sustained selloff in stocks could lead investors to sell US assets, drowning out the safe-haven demand for the currency. Noah Buffam, FX strategist at CIBC Capital Markets, points out that the AI boom has driven US rates higher, causing the dollar to rally.

However, if returns fall short, an unwind could impact equities, credit, and rates, leaving the dollar vulnerable on three fronts.