The dollar’s recent gains are at risk if the selloff in artificial intelligence stocks deepens, according to Apollo Global Management Inc.’s Torsten Slok.
International investors embracing the AI theme have spurred record net foreign inflows into US equities on a 12-month rolling basis, according to the chief economist at Apollo. But the bulk of those investors have been forgoing currency protection.
“With most foreign equity investors not hedging their FX risk, the bottom line is that if AI disappoints, the resulting pullback in these inflows would be a significant downside risk to the US dollar,” he wrote in a note Monday. That means the greenback has a “hidden dependence on the AI Trade.”
The dollar has benefited as the AI boom and subsequent record-setting rally in US stocks lured in foreign investment. Overseas investors converting their domestic currency into dollars before buying equities have provided a major boon to the US currency. At the same time, high interest rates in the US compared to major peers have made it too expensive to buy protection against dollar risks, meaning the dollar is even more exposed to swings in stock prices.
Should investors lose faith in the AI trade and start selling stocks the dollar could also pull back, according to Slok’s thinking. Doubts about the massive investments in AI infrastructure and when profits will materialize have left stocks trading sideways after hitting an all-time high in early June.
Still, traders are expecting an interest rate increase from the Federal Reserve as soon as September. A rate hike would be positive for the dollar with other major economies seen as less resilient, making their central banks less willing to tighten monetary policy.
The Bloomberg Dollar Spot Index has climbed 1.4% this year, leaving the Japanese yen and Canadian dollar among the worst performers in the Group of 10.
Written by: Anya Andrianova and Carter Johnson @Bloomberg
The post “Apollo’s Slok Warns of Dollar’s Vulnerability to an AI Pullback” first appeared on Bloomberg
