Dollar Heads for Its First Weekly Drop in Over a Month

The US dollar is on track for its first weekly drop in more than a month. It fell against the euro and the yen this week after investors began worrying about the future of artificial intelligence, or AI, companies. At the same time, fears about a bigger conflict involving Iran started to fade. These two forces pushed traders to rethink how strong the US economy really is.

AI stocks — shares in companies that build and use artificial intelligence — dropped sharply this week. The trouble spread to parts of the credit market, which is where companies borrow money. Investors had put a lot of money into AI-related companies all along the supply chain, meaning everyone from chip makers to data center builders. Now those investors are worried that data center operators may not make enough money in time to pay back what they owe.

Analysts said that what happened on Wednesday gave a preview of how currencies might react if AI stocks fell hard again. Usually, when markets get scary, investors rush to buy US dollars because they see it as a safe haven, or a safe place to put money. But this time, the dollar fell instead. That happened because traders started to think the Federal Reserve — the US central bank — might cut interest rates sooner than expected.

The Swiss franc, which is the currency of Switzerland, looked set to be the biggest winner this week. The franc is also seen as a safe haven, and Switzerland is not expected to cut its interest rates below zero. The franc was on track to rise about 0.61 percent against the dollar for the week. That may sound small, but in currency markets, even tiny moves matter a lot.

The dollar index, which measures the dollar against six other major currencies, fell 0.25 percent to 101.77. It was set for a weekly drop of about 0.45 percent. The index did rise on two days this week, including Wednesday, when data showed that US prices were rising faster than expected — a sign called hotter-than-expected inflation. However, that gain was not enough to make up for the losses caused by the AI stock selloff.

The US stock market showed signs of recovery on Thursday. The S&P 500, which tracks 500 large US companies, ended the day higher after falling early on. Investors who were worried about AI stocks moved their money into healthcare and consumer companies instead. This kind of shift shows how quickly investors can change their minds when they feel uncertain.

Thierry Wizman, a currency and rates expert at Macquarie Group, explained why a drop in AI investment could hurt the dollar. He said a slowdown in AI spending would mean fewer US government bonds being sold, and it could also slow down the whole US economy. Less AI investment could be bad news for the dollar and for American growth. 'That's because it would reduce bond supply and impair US growth, all else equal,' he said.

US Treasury yields — the interest rates on government bonds — dropped earlier this week even though inflation data came in hot. That sounds confusing, but it happened because several Federal Reserve officials spoke carefully about future rate hikes. Markets now think there is an 87 percent chance the Fed will keep interest rates the same at its next meeting, according to a tool called CME FedWatch. When rates are expected to stay the same or fall, the dollar tends to weaken.

Investors also believe that US President Donald Trump will try to avoid making conflicts in the Middle East or Ukraine worse. A bigger war could push up inflation and slow the economy, which would hurt Trump's party in the upcoming midterm elections. That belief has helped calm some of the fear in markets this week. Less fear about war usually means less demand for the dollar as a safe haven.

The euro rose 0.14 percent to $1.1235 on Friday and was set for a weekly gain of 0.39 percent. On Thursday alone, it rose 0.56 percent — its biggest single-day jump in two months. Chris Turner, a currency expert at ING bank, said the dollar might stay steady near its recent highs unless AI stocks fall sharply again. He added that the dollar would only drop significantly when short-term interest rates fall.

The Japanese yen was set for a weekly gain of 0.28 percent after falling for four straight weeks. The Bank of Japan's governor, Kazuo Ueda, said on Friday that Japan will keep raising interest rates as its economy grows. When a country raises interest rates, its currency often gets stronger because investors earn more by holding it. The yen had been under pressure earlier because the Iran conflict pushed investors toward the dollar.

The Australian dollar rose 0.55 percent on Friday but was still heading for a weekly loss of about 0.3 percent against the US dollar. Australia released a jobs report on Thursday that showed fewer jobs were added than expected. That surprisingly soft report made investors think Australia might not raise its interest rates again soon. When rate hike hopes fade, a country's currency tends to fall.