Dollar slides to multi-week low as AI jitters pull treasury yields lower

Market comment  on behalf of Zaheer Anwari – Founder of The Revacy Fund

The US Dollar Index has extended its pullback to trade near a three-week low on Thursday as Treasury yields continue to ease. Investors have moved back into government bonds amid renewed concerns around AI spending and technology valuations, pulling longer-dated yields lower and taking some of the support away from the dollar. US equity futures are also pointing lower in pre-market trading.

The latest concerns have again come from the AI trade rather than the Federal Reserve. Meta beat expectations with third-quarter revenue of $64.6 billion, but also raised the lower end of its 2026 capital-spending forecast to $135–145 billion and announced plans for a new class of non-voting shares as it continues to fund its AI expansion. Tesla, meanwhile, cut its full-year capital-expenditure forecast to around $20 billion from more than $25 billion.

Neither development suggests that AI demand has disappeared. The question investors continue to ask is how much capital will be required to fund the build-out, where that money comes from and whether future returns will justify the spending.

The economic data has also been softer. September single-family housing starts fell 4.6%, while pending home sales dropped 7.3% to their lowest level on record. That has added to demand for Treasuries and helped push yields lower.

Markets now see only around a 15% chance of another Fed hike at next week’s meeting, with most economists expecting rates to remain unchanged on October 28. A further increase in December remains very much in play, particularly while inflation and energy prices remain elevated.

From a technical perspective, the recent weakness in the dollar still looks more like a correction within the recovery that began in September than a confirmed reversal. The Dollar Index rallied from below 99 in early September to above 102 in October before pulling back.

Treasury yields remain central to that view. The 10-year broke above 5% in September, and that level is now an important technical marker. A sustained move back below 5% would weaken the higher-rate argument that has supported the dollar and could open the door to further downside.

What is particularly interesting is that the dollar has not benefited much from the latest increase in geopolitical risk. Tensions in the Gulf have escalated again, with renewed Houthi attacks on Saudi Arabia and the US beginning to withdraw some diplomatic personnel and families from the region. Brent has climbed above $111 a barrel, close to a five-month high.

Instead, much of the safe-haven demand has flowed into Treasuries and the Japanese yen. The yen has also been helped by comments from Bank of Japan Deputy Governor Ryozo Himino, who said further rate increases are likely to be needed as inflation remains close to target.

Japanese investors have now sold foreign bonds for five consecutive weeks, their longest selling streak in four years. That is another flow worth watching if Japanese yields continue to rise and more capital starts moving back home.

From a portfolio perspective, we remain flat on the dollar. The recovery since September is still intact, but if that move has been supported by rising Treasury yields, we want to see those yields remain strong before committing capital. A sustained break below 5% on the 10-year would be an important warning that the picture is changing.

Our focus remains on buying and compounding the strongest stocks in the strongest sectors. With technology and AI working through another period of uncertainty, we remain selective and allow price to tell us where the strongest trends are.

Weekly jobless claims arrive later today, but next week carries far more weight. The Fed announces its decision on October 28, followed by the first estimate of Q3 GDP and September PCE on October 29. The Bank of Japan then concludes its two-day meeting on October 30.

With Brent above $111, inflation remains the key link between all of these markets. Strong inflation data would strengthen the case for another Fed hike in December and could push yields and the dollar higher again. Softer data, particularly alongside continued weakness in technology, would strengthen the case for a deeper pullback.

Zaid Barem / ymm