The US dollar's traditional role as a safe-haven asset is being tested by recent AI-related market jitters. The USD two-year OIS/SOFR rates have dropped 25 basis points since October 14, driven almost entirely by concerns about artificial intelligence, with little macroeconomic input. This shift suggests that if stock market instability originates in the tech or AI sectors, the dollar may lag behind other G10 currencies rather than serving as a safe haven.
Despite these moves, markets do not appear to be on the brink of a major USD decline. A December Fed rate hike remains likely, and policymakers are not signaling a dovish stance at the October meeting. The DXY index could return to 101.0 in the coming weeks, but further downside seems limited for now. The US calendar is light this week, and the FOMC is in its pre-meeting communication blackout.
In Europe, EUR/USD is struggling to maintain support as protests in France spill over into local assets. The 10-year OAT-Bund spread remains around 135-140 basis points, reflecting ongoing fiscal risks in France. While markets have been somewhat relaxed about France's budget situation, continued protests could weigh on domestic stocks and limit EUR/USD's upside. The eurozone's composite PMI release on Friday will be a key focus.
Canada's inflation data for September is set to be released today, with the headline rate expected to accelerate at a 0.2% month-on-month pace. Despite some warning signals from the jobs market, a December rate hike by the Bank of Canada remains a possibility. Markets are fully pricing in a 25 basis point hike in December, with limited upside for the Canadian dollar.