The US dollar weakened on Tuesday as traders weighed the risks of escalating tensions in the US-Iran conflict and the sustainability of strong investments in AI companies. Oil prices, which had earlier hit a five-month high, dipped as traders considered a meeting between the Iranian president and Pakistan's army chief against ongoing attacks in the Gulf. Higher oil prices have raised concerns about prolonged inflation, which initially boosted the dollar last week after September's consumer price data showed acceleration.
Dominic Bunning, head of G10 FX strategy at Nomura, noted that while higher energy prices support the dollar, excessive inflation could undermine the AI-driven capital inflows that have been a key dollar support. This delicate balance was highlighted by Elice Group's 32% plunge in its Seoul market debut, renewing doubts about the durability of AI-linked investments.
The dollar index fell 0.25% to 101.71, with the euro gaining 0.22% to $1.1235. However, traders remain cautious about the euro due to France's ongoing protests and fiscal challenges. Tommy von Brömsen, FX strategist at Handelsbanken, warned that the bearish outlook on France is likely to persist, suggesting further euro weakness ahead.
The British pound strengthened 0.59% to $1.338 after resilient labor market data fueled expectations of another interest rate hike by the Bank of England. Lale Akoner, global market strategist at eToro, noted that a strong labor market could provide both the justification and opportunity for further rate increases, potentially benefiting the pound.
The Japanese yen rose 0.21% to 158.14 per dollar following a record demand at a 20-year Japanese government bond auction. Masahiko Loo, senior fixed-income strategist at State Street Investment Management, interpreted this as a sign that sidelined cash is returning to the market, with JGBs offering a relative haven from Europe's political and fiscal volatility.
Elsewhere, the Canadian dollar climbed 0.34% to 1.406 per US dollar, reaching its highest level in nearly a month after Alberta residents voted overwhelmingly to remain part of Canada in a historic referendum on separation.