US Dollar: Recovery prospects with data-driven support – BBH

Brown Brothers Harriman’s Elias Haddad notes that recent AI-related equity weakness boosted bonds and weighed on the US Dollar (USD), despite a firm US Consumer Price Index (CPI) print that kept Federal Reserve (Fed) tightening expectations alive. Haddad expects the USD to recover if October PMIs confirm US growth leadership, while foreign flows into Treasuries remain a key support for USD resilience.

Dollar seen regaining ground on PMIs

"The synchronized correction in technology stocks and USD has led some to argue that the dollar is vulnerable to an AI-led equity market sell-off, as foreign investors unwind their US stock holdings. We disagree. An AI/tech unwind would simply encourage foreign investors to rotate back into safe-haven Treasuries, underpinning the dollar's defensive appeal."

"USD tends to move in tandem with net foreign purchases of US Treasuries and in the opposite direction to net foreign purchases of US equities. That challenges the view that weaker foreign demand for US stocks would automatically drag USD lower."

"We expect USD to recover this week especially if the October PMIs (Friday) confirm the US retains its growth edge over other major economies."

"The Treasury rally and USD pullback came despite a hot US September CPI print that reinforced the Fed’s hawkish bias. Nevertheless, calls for patience from many Fed officials (Bowman, Williams, Waller, Daly) kept expectations of a back-to-back October hike in check. Fed funds futures imply less than 20% odds of a hike on October 28 and still fully price a 25bps increase to 4.00-4.25% on December 9."