MUFG’s Lee Hardman notes the US Dollar has quickly surrendered gains made after the stronger US CPI report, with the Dollar Index retreating from a year-to-date high near 102.95 back towards 102.00. He links the move to an unwind of AI-related trades and risk-off conditions, but stresses that firm inflation data and Fed expectations still provide a supportive backdrop for the Dollar.

AI sell-off reverses CPI boost

“The US dollar has weakened overnight quickly giving back yesterday’s initial gains after the release of the stronger than expected US CPI report for September.”

“After hitting a fresh year-to-date high at 102.95 yesterday, the dollar index has since fallen back towards the 102.00-level.”

“The reversal lower for Us yields and US dollar appears to have been driven mainly by an unwind of AI-related trades overnight resulting in more risk-off trading conditions.”

“After record capital inflows into the US equity market encouraged by investor optimism over AI (click here), the price action overnight highlights that it leaves the US dollar vulnerable to a correction lower when investor sentiment towards AI sours.”

“Nevertheless, the current fundamental backdrop remains supportive for the US dollar.”