Dollar slips as AI worries fuel bond rally

The US dollar traded lower on Friday as a renewed sell-off in artificial intelligence shares drove investors toward safety. The move reversed the typical market response to risk aversion, which usually favors the greenback and higher US bond yields.

Results from Alphabet, released earlier in the week, rekindled fears about the high cost of AI infrastructure. The stock market slump increased demand for US Treasury bonds, causing yields to drop to their lowest levels in over a month. The yield on the benchmark 10-year note stood at 4.8958%, while the 30-year bond yield fell to 5.2623%.

Sim Moh Siong, an FX strategist at OCBC, noted that the reaction differed from standard risk-off episodes driven by energy prices. Instead of supporting the dollar, US-centric AI concerns led to lower yields and a softer currency. The dollar index, which tracks the US dollar against a basket of peers, ended the day slightly weaker at 101.77.

The dollar remained on track for a 0.3% gain for October, marking a second consecutive monthly increase. However, the yen showed little movement ahead of the Bank of Japan's policy decision. The central bank is expected to hold its benchmark interest rate at 1.25%, a move widely anticipated by traders.

Market participants are pricing in an 80% probability that the Bank of Japan will hike rates in December. The yen weakened slightly to 157.815 per dollar, positioning it for a 0.2% decline this month. Other central banks, including the European Central Bank, the US Federal Reserve, and the Reserve Bank of New Zealand, recently kept their rates unchanged amid persistent inflation.

Khoon Goh, head of Asia research at ANZ, described the current pause as temporary, arguing that the global tightening cycle will continue to drive foreign exchange markets. He suggested that if inflation remains elevated into 2027, central banks may need to implement further rate increases.

Oil prices stayed elevated, with Brent crude futures on pace for an 11.5% gain in their fourth straight monthly rise. The euro held flat at $1.1185, while sterling strengthened 0.1% to $1.3390. The Australian dollar was little changed at $0.7030, and the New Zealand dollar weakened slightly to $0.5626.