MUFG’s Lee Hardman notes that the US Dollar has reversed its initial post-election losses despite a sharp sell-off in AI-related equities. While higher energy prices and record foreign demand for riskier US assets have supported the Dollar this year, a reversal in these trends could weigh on the currency. Tighter financial conditions could also reduce the likelihood of a Fed rate hike in December, adding to downside risks for the Dollar.

AI equity rout underpins Dollar resilience

“The spillover impact from the AI-related equity market sell-off into the foreign exchange market has remained surprisingly modest so far.”

“It has resulted in the dollar index reversing all of its initial losses since the US mid-term election results were announced.”

“US dollar strength this year has been supported by higher energy prices and record foreign demand for riskier US assets.”

“If both these drivers continue to reverse, it would increase the likelihood of the US dollar weakening.”

“If financial conditions continue to tighten it could make it less likely that the Fed will hike again in December as planned thereby adding to downside risks for the US dollar.”