Concern Over AI Firms' Debt Pushes Dollar Back; Has the Uptrend Ended?

In brief: Concerns over AI companies' debt, including CoreWeave, have shifted market attention from US inflation to the financing risks of the industry. After rising more than 4% in one month, the dollar has given back part of its gains. ING considers the 102.40 to 102.50 range to be a zone where the dollar may […]

Worries about the debt of AI companies, including CoreWeave, have shifted the market's focus from US inflation to the industry's financing risks.

After growing more than 4% in a month, the dollar gave back part of its increase; ING sees the 102.40 to 102.50 range as an area where sellers may reactivate.

EURUSD returned after reaching the range of 1.1100 to 1.1120; But reaching the range of 1.1300 to 1.1350 depends on the continued correction of the dollar.

The US dollar initially strengthened after higher-than-expected inflation was released; But this growth lasted only a few hours. With increasing concerns about the debt of companies active in the field of artificial intelligence and the wave of bond sales of some of these companies, the dollar and the yield of short-term US bonds changed their direction. Now the market's attention has shifted from the interest rate of the Federal Reserve to the sustainability of AI infrastructure financing.

Meanwhile, the Swiss franc has outperformed and the EURUSD has bounced back after hitting the 1.1100-1.1120 range. ING believes that the dollar may enter the stabilization or correction phase after growing more than 4% in a month; But it is not yet clear how far concerns about artificial intelligence can continue this trend.

This report of Ambassador Arjan was prepared based on the analysis published on the ING website and translated and rewritten for the Persian speaking audience.

Why did the dollar retreat after the release of higher than expected inflation?

The release of higher than expected US inflation data initially led to the strengthening of the dollar and an increase in the yield of short-term bonds of this country. This reaction showed that the market has taken more seriously the possibility of the Federal Reserve raising interest rates again in October.

But this process did not last. Only a few hours later, the growth of short-term bond yields and the dollar reversed, and investors' attention shifted to the developments in the debt market of companies active in the field of artificial intelligence.

This turn shows that in the current situation, the currency market does not move only on the path of inflation and interest rate expectations. Concerns about the financing of large technology companies and the possibility of reducing the enthusiasm of investors to buy high-risk bonds can also affect the flow of capital and the value of currencies.

However, it is still not possible to conclude that these developments are the beginning of a widespread crisis in the financing of artificial intelligence. What is currently seen is the increase in the sensitivity of investors to the amount of debt of companies and the price of their bonds.

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What message does CoreWeave's debt have for the AI market?

One of the companies in the spotlight is CoreWeave; A company that provides processing infrastructure, access to GPUs, and data center capacity for artificial intelligence cloud services.

The company's debt has faced selling pressure, with its 2032 bond trading at around 78 cents per dollar of face value. The drop in bond prices to this level has drawn the market's attention to the company's credit risk and its financing cost.

The importance of this event goes beyond the status of a company. The development of artificial intelligence infrastructure requires heavy investment, and part of this capital is financed through debt. If investors become more cautious to buy bonds of companies in this field, the cost of financing new projects may increase.

However, the drop in CoreWeave's share price alone does not prove that investing in artificial intelligence has reached a dead end. The main question is whether the sales pressure will spread to other big companies in this industry or not.

Which currencies will suffer if investment in artificial intelligence is corrected?

From ING's point of view, recent developments can provide an initial picture of the reaction of the currency market in the event of a large-scale correction in the artificial intelligence sector.

In such a situation, the dollar does not necessarily act like a safe-haven asset. If fiscal concerns lower Fed interest rate expectations, the dollar may weaken; even if at the same time the atmosphere of the financial markets has become more risky.

Conversely, currencies that are more connected to the supply chain of AI chips may suffer. Taiwan dollar and South Korean won are among the currencies that ING mentions; Because the economies of Taiwan and South Korea play an important role in the production and export chain of semiconductors.

This difference in the reaction of currencies is important: if the AI ​​industry is reformed, the market effect on each currency can depend on the degree of dependence of the respective economy on this industry, as well as interest rate expectations.

Why is the Swiss Franc benefiting from market concerns?

The Swiss franc has been one of the most successful currencies in recent developments. ING believes the franc could continue to perform well if concerns about AI financing increase.

One of the proposed reasons is the lower base interest rates in Switzerland and the possibility of narrowing the interest rate difference between this country and other economies. Changing these differences can affect the relative attractiveness of currencies and capital flows.

However, Frank's performance isn't just about AI-related concerns. Global bond market conditions, monetary policy expectations and the amount of demand for liquid and low-risk assets can also play a role in its movement.

Will the dollar enter the correction phase after the monthly growth of 4%?

The U.S. dollar index (DXY) briefly touched a new high this year in recent trading, but then lost some of its gains. ING reminds that the growth of more than 4% of the dollar in one month was a significant movement.

The institute believes that the dollar may enter a period of stabilization or correction in the short term instead of continuing its rapid rise.

In ING's scenario, the 102.40-102.50 range could be where dollar sellers re-enter the market. On the downside, the 101.75 to 101.85 range is seen as support.

These levels are ING's technical assessment and scenario and are not a guarantee of a stop or price reversal. The continued sale of bonds of large artificial intelligence companies can put pressure on the dollar; Conversely, decent retail sales and US producer price index data may support it.

Could EURUSD retrace 1.13-1.135?

EURUSD reached the range of 1.1100 to 1.1120; The same range that ING had proposed as a downward target in recent weeks. However, the pair then bounced back quickly.

From ING's point of view, the possible correction of optimistic expectations about the continuous growth of the artificial intelligence industry could be one of the factors that give the euro a chance to recover; Especially if these developments lead to a weakening of the dollar.

However, France's financial problems are still an obstacle to the sustainable strengthening of the euro. Therefore, even if the EURUSD is freed from the pressure of the dollar, it remains to be seen whether the concerns related to the French budget and debt will also decrease in order to continue the rise.

ING suggests the possibility of EURUSD returning to the range of 1.1300 to 1.1350, but this scenario depends on the continued correction of the dollar and should not be considered as a definitive price prediction.

summary; The market between US inflation and artificial intelligence risks

The dollar's short-term reaction suggested that even better-than-expected inflation data may not sustain its bullish trend if another factor grabs investors' attention.

Currently, the debt of companies active in the field of artificial intelligence and the price of their bonds has become one of the variables of interest in the market. However, it is still too early to draw conclusions about stopping the financing of this industry.

ING believes that after a month of strong growth, the dollar may enter a stabilization or correction phase. Meanwhile, the Swiss Franc could benefit from the change in market expectations, and the EURUSD will have a chance to return to the 1.1300 to 1.1350 range if the dollar continues to weaken; However, French financial risks are still an obstacle for the euro.