AI Rally, Haven Flows Boost Bets on Further Dollar Gains

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(Bloomberg) — Traders are betting the US dollar will rise in the weeks ahead, supported by lingering uncertainty over US-Iran talks and an AI-fueled rally in US stocks.

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The Bloomberg Dollar Spot Index advanced last month as investors gauged the tenuous progress of negotiations between the US and Iran to end the war. The conflict has effectively shuttered the Strait of Hormuz, sending energy prices soaring, and catalyzed fears that global central banks, including the Federal Reserve, will need to hike interest rates to counter inflation.

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On Monday the gauge rose another 0.2%, moderating earlier gains after President Donald Trump said on social media that Israel and Lebanon had agreed not to attack each other. The euro traded around the $1.1635 level as of 2 p.m. in New York; the yen was at 159.65 per dollar. 

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The greenback was supported early Monday from a report showing US manufacturing activity in May expanded at the fastest pace in four years.

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The dollar has also found strength in recent weeks from a resilient US stock market, where enthusiasm over artificial intelligence has buoyed equity prices despite the undercurrent of geopolitical stresses. The S&P 500 Index rose about 5% in May to fresh record highs, on top of a 10% gain in April.

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Investors this week will look to fresh data — notably Friday’s May jobs report — to assess the health of the US economy and the Fed’s path under new Chairman Kevin Warsh.

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“There is a creeping view that US growth could be re-accelerating as AI investment seeps through the broader economy,” Chris Turner, head of foreign-exchange strategy at ING Bank, wrote Monday. “This week’s data should further support the growing narrative that the Fed can be comfortable with its full employment mandate and can focus squarely on the upside risks to inflation.”

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Speculative positioning in the currency derivatives market suggests that traders are increasingly bullish on the greenback. Leveraged funds, asset managers and others now hold about $16.5 billion in long wagers on the US currency, according to Commodity Futures Trading Commission data aggregated by Bloomberg — the most since April and up from only about $5 billion three weeks ago.

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At Deutsche Bank, currency strategists led by George Saravelos said Monday that higher US services exports driven by the AI boom could improve the nation’s current account balance by roughly 1% of GDP. 

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“The dollar will be the predominant beneficiary of future AI income streams,” Saravelos wrote. The currency is “currently only moderately supported by the AI capex boom” but “the dominance of US technology companies suggests they will reap future profits on the capex.”

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What Bloomberg strategists say…

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“As the dollar spikes anew following reports on a setback in US-Iran communications, it further strengthens a relationship with oil that has been a rarity in the past two decades.”