Why 'hot money' around the AI boom could threaten the dollar's safe-haven status

The AI boom has drawn huge amounts of foreign capital into U.S. assets, but those inflows could now leave the dollar vulnerable, analysts interviewed by Reuters say. They liken these flows to the “hot money” typical of emerging markets: money that can quickly reverse course if expectations are not met.

As a result, the dollar, traditionally seen as a safe haven, is increasingly viewed as a crowded bet on Big Tech. If enthusiasm for AI fades, a selloff in U.S. assets could weaken the currency, reversing its usual response to market turmoil.

Potential foreign outflows could overwhelm traditional demand for dollars in times of turmoil, Reuters notes. If investors begin unwinding the AI trade, “it's not as clear the dollar benefits in the same way it would have done in the past,” said Dominic Bunning, head of G10 FX strategy at Nomura.

Last week offered an early warning, Reuters writes. When AI valuations came under pressure, investors seeking safety favored the Japanese yen and Swiss franc over the dollar. The dollar managed only modest gains against the euro, Reuters adds.

“The relationship between the AI trade and the dollar has become much more visible when the AI trade comes under scrutiny,” said Kevin Ford, lead FX and macro strategist at Convera.

Foreign flows into U.S. equities are at record highs, while foreign direct investment has lagged. That means a large share of the money comes from institutional funds that can more easily sell their holdings when the outlook deteriorates, writes Reuters. Erik Nelson, global head of FX strategy at Wells Fargo, likens this capital to the “hot money” flows seen in emerging markets.

“The whole AI trade caused U.S. rates to reprice higher, which has caused the dollar to rally,” argues Noah Buffam, FX strategist at CIBC Capital Markets.

But if returns on AI investments disappoint, an unwinding of positions could leave the dollar vulnerable on three fronts. Slower economic growth could force the Fed to cut rates, eroding the currency’s yield advantage. Meanwhile, a slowdown in domestic investment would undermine the U.S. economic exceptionalism narrative, while weakening demand from funds for U.S. stocks and bonds would remove a key source of financial support for the dollar, Reuters suggests.

For now, however, investors remain willing to buy dips, which suggests that sustained weakness could take months or years to unfold. A stock market rout alone would not immediately sink the currency, Reuters points out. After the Nasdaq peaked in March 2000, the dollar remained firm for almost two years. It began weakening only when corporate bankruptcies put U.S. credit markets under strain and global growth recovered.

The current AI buildout, however, is heavily concentrated in the U.S. The dollar’s real effective exchange rate has remained above its long-term average for 12 consecutive years, the longest such stretch on record. Foreign capital is also more concentrated in equities and corporate bonds than it was in 2000. In addition, the U.S. now runs a huge budget deficit, versus a surplus at the dot-com peak, which leaves policymakers far less room for fiscal stimulus without unsettling the government debt market.

If infrastructure investments fail to pay off, companies could face higher financing costs and be forced to curb capex, Reuters writes. That could ripple through the economy, hitting manufacturers of industrial equipment and server hardware, as well as the energy sector. Signs of trouble are already visible in the AI sector’s riskiest segments: credit default swap spreads for heavily indebted cloud infrastructure operators have widened sharply in recent weeks. “We can see this fraying around the edges when we look at credit default swaps,” said Shaun Osborne, chief FX strategist at Scotiabank.

For Wells Fargo’s Nelson, the key warning sign would be more than a decline in tech stocks: It would be stress spreading to U.S. credit markets and the broader economy, forcing investors to reassess their expectations for Fed policy. That could put additional pressure on the dollar.

A weaker dollar is not inevitable, Reuters notes. An acute shortage of dollar funding, as in 2008 or March 2020, could initially strengthen the currency as investors scramble for dollars to meet dollar-denominated liabilities. Nevertheless, a growing number of investors view the dollar as a major risk factor again, more clearly than at any point since the selloff triggered by President Trump’s announcement of his tariff agenda in April 2025.

“The sensitivity of global investors to a large re-rating or selloff in the dollar is substantial,” Nelson said. “As we go into '27, it's a vulnerability for the dollar that I think is worth watching.”