Dollar index falls for first time in five weeks as AI wobbles hit the greenback

The dollar index slid 0.17% to 101.87 in Friday's New York session, setting up a 0.35% weekly loss — the first weekly loss for the greenback in five weeks. AI-driven market stress and fading bets on another Federal Reserve rate hike combined to knock the dollar off its October highs, according to Reuters.

The euro bounced off a 17-month low to $1.1227, helped by Thursday's 0.56% jump, the strongest day in two months. Sterling climbed 0.31% to $1.3314 for a 0.63% weekly gain, and the Swiss franc stretched a two-session rally beyond 1.4%. The slide came even though hot US inflation prints earlier in the week had first pushed both higher.

The irony: the AI boom that fueled the dollar's five-week rally is now what's pulling it down.

Why it matters

Forex desks have traded one theme all autumn — US exceptionalism built on AI capex, juiced by September's 25bp Fed hike and a steady stream of hawkish talk. The 10-year Treasury yield hit 5.33% after September CPI printed 3.7% on October 14. This week both legs wobbled. AI shares cratered on doubts that data-centre operators can turn profitable fast enough to service their debts, while Fed officials signaled no rush to tighten again. Money fled into Treasuries — the 10-year is heading for its steepest weekly drop in over a year — but skipped the usual dollar safe-haven stop along the way.

Spectra Markets president Brent Donnelly tied the two trades together. Should investors start pricing in "peak AI capex," he told Reuters, the dollar becomes "a sell" — the US economy, in his image, a "one-legged stool" resting on the AI trade. With speculators still long dollars, he warned, deeper AI jitters could unwind that positioning and drag the greenback lower still.

StoneX's Matt Weller flagged the oddity in the price action. A tech selloff normally hands the dollar "a safe-haven bid," he told Reuters; this week the bid went to bonds instead, while "the dollar is actually falling." For traders, that decoupling is the signal: the dollar's premium is now hitched to the capex boom rather than risk appetite. The contrast with Thursday's dollar-near-highs read is sharp — Friday's reversal vaporized that support within a session. And the hot CPI print that built the rally is already two news cycles old.

How the dollar got here

The five-week winning streak rested on aggressive Fed pricing and AI momentum. Two hotter-than-expected inflation prints — CPI at 3.7% on October 14, PPI at 6.3% on October 15, the fastest since December 2022 — briefly lifted October hike odds toward 40%. The euro was the casualty, sliding more than 3% in five weeks as France's debt risk premium spiked in early October and winter-energy fears resurfaced. Then the pricing cracked. Fed officials spent the week saying the central bank can wait for more clarity, and Chair Kevin Warsh refused to "prejudge meetings" at the IMF gathering in Bangkok on Friday. Strategists had flagged the speech as a possible hawkish risk; his silence read dovish. CME FedWatch odds of an October hold jumped from 72% in Friday's Asia session to 83% by the New York close, implying hike odds of only 17%. BNY's John Velis doubted the committee could muster backing for an October move, leaving December, in his words, "an unanswered question."

The yen's subplot ran in parallel. USD/JPY climbed for four straight weeks as Iran tensions propped up the dollar and Tokyo's intervention warnings kept 160.00 as the market's red line. The pair finally broke this week, easing 0.08% to 158.11 in New York — the yen's first weekly gain in five. Friday's range ran 157.70 to 158.34, the top just shy of the prior day's 158.35 high. Tokyo's intervention warnings kept 160.00 as the market's red line. Bank of Japan Governor Kazuo Ueda reiterated on Friday that underlying inflation could overshoot the 2% target, keeping December hike pricing at 88-90% against about 10% for the October 30 meeting.

Five weeks of dollar strength were built on hike pricing and AI momentum. Both legs gave way this week.

The week's scoreboard

Sterling's edge came with domestic help — UK output rose an unexpected 0.1% in August — while the Aussie slid 0.8% after Thursday's weak jobs report trimmed rate-hike bets. WAM's wire independently confirmed the Asia-session figures (DXY 102.07, USD/JPY 158.13, EUR/USD $1.1210), and CNA's recap had the euro at $1.1232 and the yen at 157.92.

Friday's session ranges show how tight the trading stayed even as the weekly trend turned:

And the Fed pricing that moved it all:

December meeting hike odds sit near 89%, which is why the dollar's fall looks more like a repricing than a regime change. The soft dollar lifted gold 0.17% to about $4,177.14 an ounce on Friday, per CNA, while Brent rose 0.85% to $106.83.