Today’s price action is another reminder that the underpinnings of the US dollar’s rally this year is AI capex spending.
It’s an intense risk-off day and yet the US dollar is down on most fronts or close to flat. It just fell into negative territory against the euro on the day despite riots and debt concerns in France. It’s also sitting at a one-month low against the Canadian dollar and down 120 pips against the yen.
Some of that is a sharp drop in Treasury yields but in the bigger picture, it’s all one big trade: AI.
Right now, the market is questioning where all the money will come from to fund the AI build out and finding a tough time making the math work. The costs are so staggaringly high and it’s so crowded that would-be lenders are tapped out and the broader investing public is skeptical of piling into a crowded trade.
It’s now abundantly clear that much of the USD outperformance in the past year has been money flowing towards the US capex buildout and associated equities. If you wanted to invest in AI, the USA was the only real game in town. Now with valuations stretched and some questions about how the frontier models will compete with open source models, the economics of it all are in question. That’s leading to a reverse of the same flows that drove the USD higher.
Moreover, the fundamentals don’t support the US dollar at current levels in a world that’s seeing trading relationships fray and the US stuck in a quagmire in Iran. So even if AI stands still, there’s a force of gravity on the US dollar that’s negative and needs constant AI dollars to support it. Said differently, it’s only a matter of time until the dollar retreats.
This article was written by Adam Button at investinglive.com.