Experts agree: US Dollar might have reached a top with the AI bubble teetering

The US Dollar (USD) has depreciated sharply against most of its major peers over the last two days, hammered by a mix of lower US Treasury yields and dovish comments by Federal Reserve (Fed) officials. The US Dollar Index (DXY), which measures the Greenback's value against a basket of six majors, has retreated to the 101.60 area from weekly highs near 103.00, and is set for its first weekly decline in one month.

The weekly chart shows a bearish engulfing candle in progress, which is a common pattern for trend reversals. From a more fundamental perspective, analysts from some of the world’s major commercial banks observe solid reasons to support that view.

Dollar rally questioned as Fed signals and AI risks temper upside

Analysts at MUFG/BTMU observe that Fed Chair Warsh “gave little away today that underlines the potential for surprises ahead under this new Fed regime,” noting that “we will likely get a better understanding of that when numerous working groups report findings, including on AI and inflation.”

The bank notes that “a December rate hike is still very likely, but the pricing of hikes in 2027 looks overdone,” a view also expressed by New York Fed President Williams, “one of the more senior members of the FOMC,” as MUFG/BTMU highlights in a note.

The OCBC puts the focus on the AI boom: “AI has supported US growth, equities, yields and the USD. But that strength cuts both ways. If the investment cycle cools, those same supports could reverse, leaving the dollar vulnerable even in a risk-off environment.” OCBC experts caution that “the USD does not always benefit from risk aversion. When the shock originates in the US, as with the recent AI financing jitters, pressure on US assets can overwhelm the USD’s traditional safe-haven appeal. That matters because AI has become an important pillar of US growth resilience.”

Strong US data has failed to lift the US Dollar

Commerzbank experts note “surprisingly strong US consumer price data on Wednesday were followed yesterday by stronger-than-expected retail sales and producer price figures,” which “adds to the evidence that price pressures are becoming increasingly broad-based.”

The bank, however, observes that “the dollar was unable to hold on to its gains from Wednesday,” and argues that “for the dollar to receive lasting support, the market would need to price in more tightening overall than it did previously. So far, that has not happened. US rate expectations for the end of this year have barely moved in recent days.”

Along the same lines, DBS flags that “overall, the USD’s failure to sustain gains following the upside CPI surprise raises questions about the durability of its rally.” In their view, “the reversal in Treasury yields and in Fed hike expectations suggests that investors are mindful of growth and earnings risks from further tightening,” limiting the scope for a more persistent Dollar bid despite stronger data.