The dollar gave back its inflation-fueled gains in a hurry. After a rally tied to hotter price data, a bid for bonds knocked yields lower and dragged the currency down. By the close, the Bloomberg Dollar Spot Index was off 0.3% for its steepest drop since early September, and the dollar fell against nearly every major currency, including a roughly 1% slide versus the Swiss franc.
One market voice pointed to a curious culprit. Andrew Hazlett, a foreign-exchange trader at Monex Inc., said, "As AI debt has sold off, there has been a flight to safer assets like Treasuries, which is pushing down yields, which is pressuring the dollar." Bank of America's Alex Cohen called it a head scratcher: "Markets are in a bit of a weird place right now," noting that while AI worries are driving haven demand, the dollar's tight link to AI spending means any sector wobble can boomerang on the greenback.
That bond strength arrived alongside firmer US numbers. Data released Thursday by the Bureau of Labor Statistics showed producer prices climbed 1.3% in September, the largest gain in over four years. Retail sales also topped forecasts, helped by gasoline outlays. A day earlier, stronger-than-expected consumer inflation rekindled expectations for Federal Reserve rate hikes and, for a short time, briefly lifted the dollar to a peak last seen in May 2025.
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Traders now zero in on remarks from Fed Chairman Kevin Warsh, scheduled for late Thursday New York time at the International Monetary Fund and World Bank Group's annual meetings in Bangkok, Thailand. With the Fed's communications blackout starting Saturday ahead of the October meeting, it is his final opportunity to be heard. Before the September hike, Warsh's hawkish tone nudged markets to reprice the path for rates. He has also said he will not guide markets with his short-term views, but the fresh inflation surprise will put extra weight on every word.
The broader tension is simple enough: if investors think AI capital spending is peaking, the dollar may have a problem. As Brent Donnelly of Spectra Markets put it, "If the market is pricing rising odds of peak AI capex, the USD is a sell," adding, "The entire US economy is a one-legged stool balanced on the AI trade."
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