Can the US Dollar Index find support as tech sell-off eclipses hawkish Fed?

• The US Dollar comes under pressure as selling in technology shares pulls Treasury yields down.
• Concerns over returns on substantial AI expenditure grow after technology earnings fall short of expectations.
• The US Dollar retains underlying support as stubborn inflation sustains the Fed’s hawkish stance.

Risk aversion weighs on the US Dollar Index (DXY) on Friday, leaving it lower for a third consecutive day. Investors are moving into government bonds amid a technology stock sell-off, dragging Treasury yields down and putting pressure on the Greenback. Caution is also being reinforced by next week’s US midterm elections.

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

Worries about the cost of the AI investment boom have resurfaced following earnings from leading technology companies. After results disappointed investors, Alphabet shares dropped 12.6% on Thursday and Amazon slid nearly 7% in premarket trading. A weaker-than-expected outlook also sent Intel down more than 25%.

With the US at the heart of the AI spending boom that has supported economic growth, the Dollar is coming under strain. Traders are concerned that lower returns on AI investments could prompt companies to reduce expenditure, slowing the economy. Thursday’s Gross Domestic Product (GDP) report put third-quarter growth at an annualised 3.4%, compared with 2.2% in the preceding quarter.

Near-term pressure on the Dollar is likely to persist as technology shares continue to sell off, 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.”

Interest rates were held at 3.75%-4.00% following a 10-2 vote by the Federal Open Market Committee (FOMC) on Wednesday. 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 data confirmed that inflation continues to exceed the Fed’s 2% target. September headline Personal Consumption Expenditures (PCE) inflation increased 0.5% MoM and 3.6% YoY; the core measure recorded gains of 0.3% MoM and 3.1% YoY.

Expectations of a December rate increase remain firmly in place, supported by Warsh’s comments and the risk that higher energy costs stemming from Middle East tensions could keep inflation elevated for longer. The CME FedWatch Tool puts the probability at around 75%.