US Dollar Higher on Rising Risk Aversion and Safe-Haven Demand
The US dollar rose on Friday, recovering earlier losses as risk aversion increased amid a global sell-off in AI-related stocks. The latter also drove capital toward Treasuries, pushing yields down in the process. Concerns over regulatory scrutiny of data centres and slower technology investment have pushed investors towards safe-haven assets.
While interest rate hike expectations continue to support the dollar, the risk-off sentiment led to a lower probability of a hike in December. Softer monetary policy expectations could limit the’dollar’s gai’s. Today’s labour market report could influence those expectations. A strong payrolls reading would rebuild tightening bets. A soft report would leave the dollar more dependent on safe-haven demand for support.
In the Middle East, hopes for diplomatic progress have yet to produce an agreement. Any escalation could add to safe-haven demand, while a deal that reopens Hormuz would ease oil prices and weaken inflation fears, weighing on the greenback.
Policy expectations at other central banks may cap’the dollar’s upside. Bank of Japan minutes strengthened expectations of a December move, which could limit dollar gains against the yen. Eurozone inflation rose to 4.0% in October and an ECB hike is priced in. The Bank of England delivered its first interest rate increase in more than three years and signalled further tightening if the tension in the Middle East persists, which could give sterling room to rise.
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