The US dollar's traditional role as a safe-haven asset is facing new challenges due to the influx of foreign capital chasing returns from the AI boom. Investors have long relied on the dollar during market downturns, but the growing concentration of foreign money in US mega-cap equities, hyperscaler corporate bonds, and power-grid infrastructure has made the dollar increasingly sensitive to risk. If the AI narrative falters, the dollar's safe-haven status could clash with its new role as a risk-sensitive asset owned by price-sensitive investors.
Last week provided an early warning when AI valuations came under pressure, and haven flows favored the Japanese yen and Swiss franc over the dollar. The greenback managed modest gains against the euro, primarily due to concerns over French civil unrest. Analysts note that the relationship between the AI trade and the dollar has become more visible when the AI trade is scrutinized.
Foreign flows into US equities are at a record high, while foreign direct investment has lagged. Much of the capital is coming from institutional allocators that may buy or sell based on reassessments of US growth, rates, or tech valuations. Erik Nelson of Wells Fargo likens these allocations to the 'hot money' flows typical of emerging markets. The AI boom has reinforced expectations of stronger US growth, firmer inflation, and higher rates, lifting the dollar alongside Treasury yields.
If returns disappoint, an unwind of the AI trade could hit equities, credit, and rates, leaving the dollar vulnerable on multiple fronts. Weaker growth could force the Federal Reserve to cut rates, eroding the dollar's yield advantage. Slower domestic investment would undermine the narrative of American exceptionalism, and fading institutional demand for US corporate bonds and equities would weaken a major source of structural support.