US Dollar under pressure from AI equity risks – TD Securities

The Dollar faces growing downside risks from an AI-driven US equity rout, according to TD Securities analysts. Correlations across asset classes indicate that the USD is becoming more closely linked to US equities' performance relative to the rest of the world. If stocks fall sharply, expectations for Fed rate hikes could give way to rate cuts. The resulting narrowing of US rate differentials could weaken the Dollar's safe-haven appeal and set off another downtrend.

USD strength at risk from equity correlation

"Although the USD continues to rank favorably in our scorecard, its overall standing has deteriorated over the past month."

"USD still benefits from supportive external balance backdrop, and a US economy that remains resilient. However, Equity factor is starting to turn more bearish and US equity performance vs RoW could serve as the next bearish USD catalyst."

"Amid Q3 US equity earnings and the continued AI-driven equity selloff, the FX market is increasingly looking to assess the implications of a US equity rout on the USD. We believe an AI-led equity risk-off trend could act as the catalyst for a renewed USD downtrend."

"Finally, with the US continuing to yield higher than most G10 peers, a material equity risk-off will likely flip the current pricing of Fed rate hikes back to rate cuts, which in turn reduces the USD's role as a safe-haven currency as the falling rate differential with RoW [rest of the world] also weighs on the USD."

"Cross-asset correlation suggests the USD would likely weaken in the scenario of an AI-driven US equity rout before year-end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)