AI concerns outweigh inflation benefits, US dollar sees biggest single-day drop in over a month

The US dollar plunged sharply on Thursday, wiping out previous gains driven by stronger-than-expected inflation data, as safe-haven sentiment sparked by risks related to artificial intelligence became the dominant force.

The Bloomberg Dollar Spot Index fell 0.3% on Thursday, marking its largest single-day drop since September 3, with the dollar retreating against almost all major currencies, recording a roughly 1% decline against the Swiss franc.

This movement puzzled the market, as both the US Producer Price Index and retail sales data released the same day exceeded expectations and should have supported a stronger dollar. However, risk sentiment in the AI sector ultimately dictated market direction.

The next key signal will come from Federal Reserve Chair Powell. He is scheduled to speak Thursday evening New York time at the IMF-World Bank annual meeting in Bangkok. As the Fed will enter its blackout period before the October policy meeting starting Saturday, this speech will be Powell’s last chance to make public remarks before the meeting. The market’s interpretation of his wording will directly influence interest rate expectations.

The immediate trigger for the dollar's decline was selling sentiment in AI-related assets.

Monex FX trader Andrew Hazlett commented:

With AI debt being sold off, funds are flowing into safe-haven assets like US Treasuries, pushing yields down and putting pressure on the dollar.

The intrinsic link between the dollar and AI investment logic means that volatility in this sector has a more direct impact on the dollar.

Bank of America strategist Alex Cohen noted, "The market is currently in a rather peculiar state." AI concerns are driving investors into safe havens, but the dollar’s tight linkage to AI capital expenditure means that if issues arise in the sector, the dollar too will suffer.

Spectra Markets president Brent Donnelly was even more blunt in his report:

If the market begins to price in the possibility that AI capital spending has peaked, the dollar becomes a sell target. The entire US economy is little more than a one-legged stool right now, and that leg is AI trading.

Fundamental data ought to have provided solid support for the dollar.

According to Wallstreetcn, data published Thursday by the US Bureau of Labor Statistics showed that in September, the US Producer Price Index rose 1.3% month-on-month, the largest increase in more than four years. Retail sales data also beat market expectations, buoyed by gasoline consumption.

The previous day, Wallstreetcn mentioned that better-than-expected consumer inflation data had revived market expectations for Fed rate hikes, and the dollar briefly hit its highest level since May 2025 on Wednesday.

However, this rally quickly collapsed under the pressure of AI risk sentiment, highlighting the current complexity in market trading logic and showing that the guiding power of macro data is being disrupted by thematic risk aversion.

Market focus quickly shifted to Powell's speech. Prior to the rate hike in September, Powell had delivered hawkish signals, prompting traders to swiftly adjust their rate hike expectations.

Although Powell previously stated he would not use his near-term monetary policy outlook to steer markets, against the backdrop of consecutive upside surprises in inflation data, this speech will undoubtedly come under greater scrutiny.