US Dollar: AI equity risks weigh on the Greenback – TD Securities

TD Securities analysts highlight growing downside risks for the Dollar linked to an AI-driven US equity rout. Cross-asset correlations suggest the USD is increasingly tied to US equity performance relative to the rest of the world. A sharp equity selloff could shift Fed expectations from rate hikes to cuts, narrowing US rate differentials, undermining the Dollar's safe-haven appeal and triggering a renewed downtrend.

Equity correlation threatens USD strength

"Although the USD continues to rank favorably in our scorecard, its overall standing has deteriorated over the past month."

"USD still benefits from supportive external balance backdrop, and a US economy that remains resilient. However, Equity factor is starting to turn more bearish and US equity performance vs RoW could serve as the next bearish USD catalyst."

"Amid Q3 US equity earnings and the continued AI-driven equity selloff, the FX market is increasingly looking to assess the implications of a US equity rout on the USD. We believe an AI-led equity risk-off trend could act as the catalyst for a renewed USD downtrend."

"Finally, with the US continuing to yield higher than most G10 peers, a material equity risk-off will likely flip the current pricing of Fed rate hikes back to rate cuts, which in turn reduces the USD's role as a safe-haven currency as the falling rate differential with RoW [rest of the world] also weighs on the USD."

"Cross-asset correlation suggests the USD would likely weaken in the scenario of an AI-driven US equity rout before year-end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)