CNBC_ The US dollar was heading on Friday towards recording its first weekly loss in more than a month against the euro and the yen, as investor focus shifted to expectations for US interest rates, amidst receding fears of an escalating war with Iran.
AI-related stocks declined this week, with tensions spilling over into parts of the credit market, as investors worried that data center operators would fail to generate profits in a timely manner to service their debt.
Analysts pointed out that Wednesday's market movements may provide a preview of how currencies would be affected by a major AI-driven sell-off, with the dollar declining rather than attracting safe-haven demand, while expectations for US interest rate cuts grow, according to Reuters.
The Swiss franc appears set to be the biggest beneficiary once again as a safe haven, alongside expectations that Switzerland will likely not resort to cutting interest rates below its current level of zero, even in a low-interest-rate environment. The franc is expected to post a weekly gain of 0.61% against the dollar.
The US dollar index, which measures the greenback's performance against a basket of six major currencies, dropped 0.25% to 101.77 points, heading towards a weekly decline of 0.45%.
The index rose in two out of five sessions during the week, including Wednesday's session, as the positive impact of higher-than-expected inflation data outweighed the negative impact stemming from the tech stock sell-off.
The S&P 500 closed higher on Thursday, recovering from early session losses, as investors concerned about AI stocks rotated into the healthcare and consumer staples sectors.
Thierry Wizman, global FX and interest rates strategist at Macquarie Group, stated that "Wednesday's moves precisely revealed what could threaten the dollar and lead to a decline in US bond yields over the next few months and into 2027, which is the dimming outlook for investment in artificial intelligence."
He added to Reuters that "this will lead to a drop in bond supply and weaken growth in the US, other things being equal."
US Treasury yields declined earlier this week despite higher inflation readings, as cautious remarks by Federal Reserve officials scaled back expectations of interest rate hikes in October.
According to the CME Group's FedWatch Tool, traders price in an 87% probability that US interest rates will be left unchanged this month.
Investors expect US President Donald Trump to avoid any escalation in the Middle East or Ukraine, as a wider conflict could damage his standing ahead of the congressional midterm elections, in addition to potentially fueling inflation and harming the economy.
The euro rose 0.14% to $1.1235, after advancing 0.56% on Thursday, marking its largest daily gain in two months. The euro is heading for a weekly gain of 0.39%.
The yen is heading towards a weekly rise of 0.28%, after declining for four consecutive weeks, supported by the safe-haven demand generated by the Iran conflict. The yen rose in latest trades by 0.05% to 157.89 per dollar.
Higher oil prices typically support the dollar, while putting pressure on the currencies of energy-importing countries, such as the euro and the yen.
The Australian dollar rose 0.55% to $0.6959, but is heading towards a 0.3% decline against the US dollar this week, after a much weaker-than-expected jobs report on Thursday dampened market expectations regarding further interest rate hikes.
