Dollar heads for weekly loss as Fed hike bets fade, AI jitters linger

By Laura Matthews

NEW YORK, Oct 16 (Reuters) - The dollar was lower on Friday and on track for its first weekly fall in more than a month against the euro and the yen, reflecting fading expectations for a Federal Reserve rate hike and lingering concerns about an AI-driven equity selloff.

Hotter-than-expected consumer and producer price readings initially rattled markets this week, but comments from Fed officials signaling no urgency to tighten policy further helped stabilize Treasury yields and eroded support for the dollar.

AI stocks fell sharply this week and the stress spread to parts of the credit market as investors who have crowded into bets all along the supply chain worry data centre operators might not manage to be profitable in time to pay their debts. 

"What I found most interesting today and more broadly this week, is how closely the dollar has been tied to the AI trade," said Matt Weller, global head of market research at StoneX in Michigan. "Usually if we see a sell off in tech stocks you would expect the greenback to get a safe-haven bid. We are seeing an element of that into bonds, but the dollar is actually falling."

The dollar index, which measures it against six major peers, fell 0.17% to 101.87 and was set for a 0.35% weekly drop.

The pound and the Swiss franc led gains against the dollar this week, with the latter buoyed by safe-haven demand and expectations that even in a lower-rates environment Switzerland is unlikely to cut policy rates below the current zero level.

Sterling rose 0.31% to $1.3314 and was up 0.63% on the week, while the dollar fell 0.25% against the Swiss franc to 0.8246, leaving it down 0.67% for the week. The franc has gained more than 1.4% in the last two sessions.

Markets assign an 83% probability to the Fed keeping rates unchanged later this month, up from 49% a month earlier, the CME FedWatch Tool shows.

At the IMF-World Bank annual meetings in Bangkok on Friday, Fed Chair Kevin Warsh offered no clues about future rate decisions, saying he does not "prejudge meetings."

"I don’t think there is enough support in (the) committee, particularly from the governors, for a rate hike in October. It still leaves December an unanswered question and there is a lot to happen between now and then," said John Velis, Americas macro strategist at BNY in New York.

EURO AREA FISCAL RISKS STILL IN FOCUS

Fiscal risks in France remained in the background after the jump in the French debt risk premium in early October.

The euro was last up 0.08% to $1.1227 after climbing 0.56% on Thursday in its biggest daily rise in two months, putting it on track for a 0.23% weekly gain.

Investors expect US President Donald Trump to steer clear of any escalation in the Middle East or Ukraine, as a broader conflict could hurt his standing ahead of midterm elections by fuelling inflation.

Against the yen the dollar slipped 0.08% to 158.11, leaving the Japanese currency on track for a 0.13% weekly rise after dropping for four consecutive weeks as the Iran conflict supported the greenback.

Higher oil prices recently have been boosting the dollar while weighing on the currencies of energy-importing countries, such as those tied to the euro and yen.

BOJ Governor Kazuo Ueda on Friday reiterated the risks of underlying inflation overshooting the central bank's 2% target. 

(Reporting by Laura Matthews in New York; Additional reporting by Stefano Rebaudo; Editing by Edwina Gibbs, Clarence Fernandez, Chizu Nomiyama and Alexander Smith and Colin Barr)