Tech sell-off leaves US Dollar Index struggling despite hawkish Fed

• Lower Treasury yields weigh on the US Dollar as technology shares sell off.
• Returns on substantial AI investment face renewed scrutiny after technology earnings disappoint.
• The US Dollar retains underlying support as sticky inflation sustains the Fed’s hawkish stance.

The US Dollar Index (DXY) is down for a third consecutive day on Friday. Investors are moving into government bonds amid a technology share sell-off, driving Treasury yields lower and putting pressure on the Greenback. Caution is also building ahead of next week’s US midterm elections.

Around 101.65 is the index’s level at the time of writing. It tracks the Dollar against six major currencies. The benchmark 10-year US Treasury yield, meanwhile, is near 4.91%, having retreated from 5.36% earlier this month, its highest since 2002.

The cost of the AI investment boom is back in focus following earnings releases from major technology companies. Disappointing results sent Alphabet shares down 12.6% on Thursday and Amazon nearly 7% lower in premarket trading. Intel dropped more than 25% after its guidance fell short of expectations.

With the US at the centre of an AI spending boom that has supported economic growth, the Dollar is coming under pressure. The Gross Domestic Product (GDP) report released on Thursday put third-quarter annualised growth at 3.4%, compared with 2.2% in the preceding quarter. Traders worry that lower returns on AI investment could prompt companies to reduce spending and slow the economy.

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

By a 10-2 vote on Wednesday, the Federal Open Market Committee (FOMC) left interest rates unchanged at 3.75%-4.00%. 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 said that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

The Fed’s 2% inflation target remains out of reach. Thursday’s data showed September headline Personal Consumption Expenditures (PCE) inflation increasing 0.5% MoM and 3.6% YoY. The core reading rose 0.3% MoM and 3.1% YoY.

Around 75% is the probability of a December rate hike indicated by the CME FedWatch Tool. Expectations remain firmly in play following Warsh’s comments and amid the risk that higher energy costs associated with Middle East tensions could keep inflation elevated for longer.