US Dollar Index struggles as tech sell-off overshadows hawkish Fed

• The US Dollar weakens as a technology stock sell-off pushes Treasury yields lower.
• Disappointing technology earnings raise doubts about returns on heavy AI spending.
• Persistent inflation keeps the Fed on a hawkish path, offering underlying support to the US Dollar.

The US Dollar Index (DXY) loses ground for a third straight day on Friday as a sell-off in technology stocks drives investors toward government bonds, pushing Treasury yields lower and weighing on the Greenback. Next week’s US midterm elections add to the cautious mood.

At the time of writing, the index, which measures the Dollar against six major currencies, trades around 101.65. Meanwhile, the benchmark 10-year US Treasury yield stands near 4.91%, down from 5.36% earlier this month, its highest level since 2002.

Results from major technology companies renew concerns about the cost of the AI spending boom. Alphabet shares fell 12.6% on Thursday, while Amazon plunged nearly 7% in premarket trading after their results disappointed investors. Intel sank more than 25% after issuing weaker-than-expected guidance.

The US Dollar is feeling the strain because the country is at the centre of the AI spending boom, which has helped support economic growth. Thursday’s Gross Domestic Product (GDP) report showed that the economy grew at an annualised rate of 3.4% in the third quarter, up from 2.2% in the previous quarter. Traders fear that weaker returns on AI investments could lead companies to cut spending, slowing economic growth.

Strategists at Brown Brothers Harriman argue that the ongoing tech sell-off is likely to keep the Dollar under pressure in the near term, with “the USD index (DXY) likely to test support at 101.00.” However, they stress that “strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD.”

The Federal Open Market Committee (FOMC) voted 10-2 on Wednesday to keep interest rates at 3.75%-4.00%, with Governor Lisa Cook and Cleveland Fed President Beth Hammack favouring a 25-basis-point (bps) rate increase. Fed Chair Kevin Warsh reiterated his commitment to delivering price stability. He noted that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

Inflation remains above the Fed’s 2% target. Data released on Thursday showed that September headline Personal Consumption Expenditures (PCE) inflation rose 0.5% MoM and 3.6% YoY, while the core measure increased 0.3% MoM and 3.1% YoY.

Higher energy costs linked to Middle East tensions risk prolonging elevated inflation. Together with Warsh’s remarks, this keeps expectations of a December rate hike firmly in play, with the CME FedWatch Tool showing the probability at around 75%.