Financial markets are increasingly treating the prospect of rapid artificial intelligence-driven disruption as a key influence on currency moves, with the U.S. dollar singled out as a possible near-term casualty even if it ultimately benefits from productivity improvements.
UBS has warned that the dollar may lose ground in the near term, despite the possibility that AI-related efficiency gains could lift the currency over a longer horizon. Traders and analysts point to a shift in investor sentiment as global equities have softened and yield curves have bull-flattened across several major economies - a departure from the risk-on tone seen earlier in the year.
This pivot does not appear to be explained cleanly by conventional macroeconomic releases, which have delivered mixed signals. Instead, market participants are citing rising unease about how quickly and widely AI could change prospects across industries. That unease has been translating into moves in foreign exchange markets.
One channel through which AI concerns are hitting the dollar is the composition of U.S. financial markets. The U.S. is disproportionately weighted toward intangible-intensive sectors - including software, intellectual property and scientific research - which analysts regard as particularly susceptible to rapid repricing should AI accelerate structural change. By contrast, currencies tied to economies with a larger share of tangible capital have held up better in recent sessions; Japan, Norway and New Zealand are examples cited by market observers.
Analysts argue the differential exposure matters because overseas investors already maintain sizable allocations to U.S. assets. Any broad reassessment of valuations in tech and other AI-sensitive areas could prompt portfolio rebalancing that exerts downward pressure on the dollar in the near term.
Balancing that immediate vulnerability is a countervailing, longer-term narrative. Many market participants expect the United States to capture significant productivity gains from AI adoption. If those gains materialize and lift U.S. growth prospects relative to other advanced economies, the historical relationship between growth differentials and currency strength suggests the dollar could regain footing later in the year.
Current market forecasts appear to incorporate both forces. The prevailing view among analysts is for potential additional dollar softness through the first quarter while disruption fears dominate sentiment, followed by a possible rebound as evidence of productivity improvement emerges and central-bank policy expectations - including those of the Federal Reserve and the Bank of Canada - come back into focus.
The outcome being priced by markets is therefore a two-stage sequence: an early period where the dollar may be pressured by rapid repricing risks in intangible-heavy sectors, and a subsequent phase where realized productivity gains could favor the U.S. currency if they translate into stronger relative growth and monetary policy dynamics.
Key takeaways
- AI-driven disruption is creating a near-term headwind for the U.S. dollar due to the heavy weight of intangible assets in U.S. markets.
- Currencies of economies with more tangible capital structures - such as Japan, Norway and New Zealand - have shown relative strength amid recent moves.
- Markets are pricing a two-stage scenario: initial dollar softness followed by potential recovery if AI delivers sustained productivity gains that widen U.S. growth differentials.
Risks and uncertainties
- Valuation reassessment risk - Rapid repricing in technology and other AI-sensitive sectors could trigger portfolio shifts away from U.S. assets, pressuring the dollar.
- Sentiment-driven volatility - Near-term currency moves may be driven more by changing investor sentiment around AI disruption than by clear macroeconomic data.
- Policy reaction uncertainty - The timing and scale of central-bank responses, including from the Federal Reserve and the Bank of Canada, could alter the sequencing and magnitude of dollar moves.