Weak tech earnings weigh on United States Dollar Index

• Disappointing megacap earnings have raised doubts over the sustainability of the AI trade, weighing on the US Dollar Index.
• Alternative safe-haven currencies gained support as the Middle East conflict intensified and the prospect emerged of US-Israeli strikes on Iran after the midterm elections.
• Despite markets pricing in high odds of another rate increase, Fed Chair Kevin Warsh indicated that further policy tightening was not urgent.

Trading near 101.60 in Friday’s Asian session, the US Dollar Index (DXY) remains subdued for a fourth consecutive day. The index tracks the US Dollar (USD) against a basket of six major currencies.

Quarterly results from several megacap technology companies fell short of expectations, denting investor confidence. The resulting doubts over whether the AI trade can be sustained have kept the Greenback under pressure.

Risk aversion has also spread across markets as the geopolitical conflict in the Middle East intensifies. Demand for safe havens has increased following reports that the US and Israel are preparing further military strikes against Iran after the forthcoming midterm elections. Both the Japanese Yen and Swiss Franc have consequently strengthened against the Greenback.

Federal Reserve (Fed) officials, meanwhile, have shown little inclination to step up the pace of monetary tightening. Although Fed Chair Kevin Warsh recently voiced optimism about the US economy’s underlying resilience, he gave no indication of whether further interest rate increases would be necessary. Against this measured guidance, market participants using the CME FedWatch Tool currently assign a 92.8% probability to rates remaining unchanged at the forthcoming October 27–28 policy meeting.

Defensive currencies tipped to outperform as short-end yields underpin the Dollar

A shift away from higher-beta FX is evident in the current environment, according to ING analysts, who say it “probably favours a little more outperformance of the defensive currencies over commodity currencies,”. They nevertheless warn that “until the rock-solid short-end of the US yield curve starts to buckle, it is hard to make the case that the Dollar needs to fall across the board,”. Their assessment suggests that resilient front-end US yields continue to provide broad support for the Dollar, even as defensive currencies begin to gain a relative advantage within G10 FX.