"Hot Money" vs. the Dollar: Why the AI Boom Could Pose a Threat to the Safe-Haven Currency

The artificial intelligence boom has attracted massive amounts of foreign capital to U.S. assets, but analysts surveyed by Reuters believe this money could now become a source of vulnerability for the dollar. They compare these flows to the “hot money” typical of emerging markets: they can quickly reverse course if expectations are not met.

As a result, the dollar—which is traditionally considered a “safe haven”—is increasingly viewed as an overloaded bet on Big Tech. If the hype surrounding AI subsides, a sell-off of U.S. assets may not strengthen the U.S. currency, as has typically been the case during market turmoil, but rather weaken it.

The projected outflow of foreign capital could offset the traditional demand for the dollar during periods of turmoil, Reuters notes. Therefore, if investors begin to close out their positions in emerging markets, “it is no longer so clear that the dollar will benefit as much as it has in the past,” says Dominic Banning, head of G10 currency strategy at Nomura.

The first warning sign emerged last week, according to Reuters. When the valuations of AI companies came under pressure, capital seeking a safe haven flowed not into the U.S. dollar, but into the Japanese yen and the Swiss franc. The dollar managed to rise only slightly against the euro, the agency adds.

"The link between AI-related trades and the dollar becomes much more apparent precisely when the validity of those trades is called into question," notes Kevin Ford, chief currency and macro strategist at Convera.

The inflow of foreign capital into U.S. stocks is at a historic high, while the volume of foreign direct investment lags behind. This means that a large share of the capital comes from institutional funds, which find it easier to divest assets when the outlook deteriorates, according to Reuters. Eric Nelson, global head of currency strategy at Wells Fargo, compares this capital to “hot money” flows in emerging markets.

"The hype surrounding AI has caused the market to revise its expectations toward higher interest rates in the U.S., and that is precisely what triggered the dollar's rally," notes Noah Buffam, currency strategist at CIBC Capital Markets.

But if returns on AI investments fall short of expectations, unwinding positions will deal a triple blow to the dollar, according to Reuters. A slowdown in economic growth could force the Fed to cut rates, depriving the U.S. currency of its yield advantage. At the same time, a decline in domestic investment would undermine the notion of the U.S. economy’s exceptionalism, and weakening demand from funds for U.S. stocks and bonds would strip the dollar of a key financial pillar, the agency suggests.

Nevertheless, investors are currently eager to buy into any pullbacks, so a protracted decline could stretch on for months or years. A stock market crash alone won’t cause the currency to plummet instantly, Reuters adds. After the Nasdaq technology index peaked in March 2000, the dollar remained strong for nearly two years and began to weaken only when the U.S. credit market was hit by corporate bankruptcies and the global economy began to recover.

However, the current wave of AI development is heavily concentrated in the United States. The real effective exchange rate of the dollar has remained above its long-term average for 12 consecutive years—the longest such period in history. At the same time, foreign capital is now more heavily concentrated in stocks and corporate bonds than it was in 2000. Furthermore, the U.S. currently has a massive budget deficit—in contrast to the surplus at the peak of the dot-com boom—which leaves the government with far fewer options for fiscal stimulus without destabilizing the government debt market.

If infrastructure investments fail to pay off, it may become more expensive for companies to raise capital, forcing them to cut capital expenditures, Reuters predicts. This will trigger a chain reaction in the economy, hitting manufacturers of industrial equipment, server hardware, and the energy sector. Problems are already evident in the sector’s riskiest segments: credit default swap spreads for heavily indebted cloud infrastructure operators have spiked sharply in recent weeks. “The structure is already starting to crack at the edges,” emphasizes Sean Osborne, chief currency strategist at Scotiabank.

For Nelson of Wells Fargo, the main cause for concern would not simply be a decline in tech stocks, but a situation in which the problems spread to the credit market and the U.S. economy, forcing investors to revise their expectations regarding Fed policy. In that case, the dollar could come under additional pressure.

A decline in the dollar is not inevitable, according to Reuters. An acute shortage of foreign exchange liquidity, such as in 2008 or March 2020, could initially push the exchange rate higher due to panic buying to settle foreign currency debts. Nevertheless, confidence is growing in the market that the dollar has once again become a high-risk asset—for the first time so clearly since April 2025, when the downturn was triggered by U.S. President Donald Trump’s announcement of massive tariffs.

“Global investors are highly sensitive to a major revaluation or sell-off of the dollar,” Nelson warns. “In my view, this is becoming a vulnerability that warrants monitoring as we approach 2027.”

This article was AI-translated and verified by a human editor