By Karen Brettell
Oct 28 (Reuters) – Investors have long treated the US dollar as a refuge when markets fall, but foreign money chasing returns from the AI boom could weaken that safe-haven role if the trade unwinds.
Foreign capital has poured in to US mega-cap equities, hyperscaler corporate bonds and power-grid infrastructure. That has made the dollar an increasingly crowded bet on American exceptionalism, backed by faster growth, higher yields and persistent foreign demand for US assets.
But if the AI narrative stumbles, the dollar’s safe-haven status could collide with its growing role as a risk-sensitive asset owned increasingly by price-sensitive investors. A sustained selloff in stocks could lead investors to sell US assets, potentially drowning out the safe-haven demand for the currency.
If the AI trade unwinds, “it’s not as clear the dollar benefits in the same way it would have done in the past,” said Dominic Bunning, head of G10 FX strategy at Nomura.
STORM WARNING ON FOREX FLOWS
Last week offered an early warning. When AI valuations came under pressure, haven flows favored the Japanese yen and Swiss franc over the dollar. The greenback managed to eke out modest gains against the euro, mainly due to the single currency being dented by concerns over French civil unrest.
“The relationship between the AI trade and the dollar has become much more visible when the AI trade comes under scrutiny,” said Kevin Ford, lead FX and macro strategist at Convera.
Foreign flows into US equities are at a record, while foreign direct investment has lagged. As a result, much of the capital is coming from institutional allocators that may buy or sell when they reassess US growth, rates, or tech valuations.
Erik Nelson, global head of FX strategy at Wells Fargo, likens these allocations to the “hot money” flows that dominate emerging markets. The AI boom has reinforced expectations of stronger US growth, firmer inflation and higher rates, lifting the dollar alongside Treasury yields, analysts said.
“The whole AI trade caused US rates to reprice higher, which has caused the dollar to rally,” said Noah Buffam, FX strategist at CIBC Capital Markets.
If returns disappoint, an unwind could hit equities, credit and rates, leaving the dollar vulnerable on three fronts.
Weaker growth could force the Federal Reserve to cut rates, eroding the dollar’s yield advantage. Slower domestic investment would puncture the exceptionalism narrative. And fading institutional demand for US corporate bonds and equities would weaken a major source of structural support.
