US Dollar Index struggles to gain ground as tech sell-off eclipses hawkish Fed stance

• Falling Treasury yields weigh on the US Dollar as technology shares sell off.
• Returns on substantial AI investment come under scrutiny after technology earnings disappoint.
• With inflation proving persistent, the Fed’s hawkish stance provides underlying support for the US Dollar.

Lower Treasury yields weigh on the US Dollar Index (DXY) on Friday, leaving it on course for a third consecutive daily decline. Investors are moving into government bonds as technology shares sell off, putting pressure on the Greenback. Caution ahead of next week’s US midterm elections also shapes sentiment.

At around 4.91%, the benchmark 10-year US Treasury yield is below the 5.36% reached earlier this month, its highest since 2002. The index, which tracks the Dollar against six major currencies, stands at roughly 101.65 at the time of writing.

Concerns over the expense of the AI investment boom have resurfaced following results from leading technology companies. After earnings disappointed investors, Alphabet shares dropped 12.6% on Thursday and Amazon slid nearly 7% in pre-market trading. Weaker-than-expected guidance also sent Intel down more than 25%.

At the centre of the AI spending boom, the US has benefited from its contribution to economic growth, leaving the Dollar exposed to concerns about its sustainability. Thursday’s Gross Domestic Product (GDP) release put third-quarter annualised growth at 3.4%, compared with 2.2% in the preceding quarter. Traders worry that disappointing returns on AI investment could prompt businesses to reduce expenditure and slow economic growth.

With “the USD index (DXY) likely to test support at 101.00.”, strategists at Brown Brothers Harriman expect the continuing technology sell-off to maintain near-term pressure on the Dollar. They nevertheless emphasise that “strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD.”

Interest rates were held at 3.75%-4.00% on Wednesday following a 10-2 vote by the Federal Open Market Committee (FOMC). Governor Lisa Cook and Cleveland Fed President Beth Hammack preferred a 25-basis-point (bps) increase. Reaffirming his commitment to price stability, Fed Chair Kevin Warsh observed that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

Thursday’s figures showed September headline Personal Consumption Expenditures (PCE) inflation rising 0.5% MoM and 3.6% YoY. The core reading increased 0.3% MoM and 3.1% YoY, with inflation still exceeding the Fed’s 2% target.

Elevated inflation could persist for longer as tensions in the Middle East drive up energy costs. Alongside Warsh’s comments, that risk keeps a December rate increase firmly in focus: the CME FedWatch Tool puts the probability at about 75%.