'AI Dollar Is Here': Deutsche Bank Flags Risks To US Currency Amid AI-driven Equity Selloff

The traditional role of US dollar as a safe-haven asset should not be taken for granted amid an AI-driven market correction, Bloomberg reported citing Deutsche Bank AG.

The concerns over the dollar “are a lot more two-sided than the market has been pricing over the last few weeks,” George Saravelos, the bank's global head of FX strategy said in a note to clients Friday. The lalest instances of simultaneous pressure in tech stocks and the greenback support this view, he added. 

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Wall Street witnessed heavy selloff in technology shares this week, driven by concerns over artificial-intelligence spending. Disappointing tech earnings resulted in the worst decline for stocks since June, with the Nasdaq 100 slipping 3.5%. Among tech stocks, Intel Corp. dropped the most in over four decades. The S&P 500 dipped 1.8%.

This is partly driven by the massive exposure of overseas investors to US stocks. According to Saravelos, foreign investors at present finance the entire US current-account deficit. Their holdings, however have grown through valuation gains instead of fresh buying. Deutsche Bank expects nearly 90% of over $20 trillion in US equities held by overseas investors indicate price appreciation.

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The other key factor, as per Saravelos, is equity-hedging dynamics. Over the last 10 years, US stocks and the dollar had an inverse relationship, giving a large incentive for currency risk to be left unhedged. When an equity pressure is US-driven, that relationship, however turns positive, with the dollar slipping along with stocks and adding to equity losses for foreign investors.

One more factor that indicated the dollar is erasing its risk-off properties would be a simultaneous dip in US real yields and equities. Saravelos stressed that the surge in both rates and stocks this year have been linked to stronger expectations for AI-related capital spending. 

“A move lower in both US real yields and equities would be consistent with these expectations being downgraded,” he noted.

While he did not make a call on the outlook for the AI ecosystem, Saravelos noted that the changing relationship between risk assets and the dollar deserves needs attention. “The AI dollar is here,” the report said.

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