Nomura: The Biggest New Risk for the Dollar Is an AI Funding Retreat

Once the AI narrative wavers, foreign capital could retreat en masse from U.S. equities, corporate bonds and power infrastructure, simultaneously pressuring the dollar on three fronts: downward revisions to growth expectations, narrowing interest-rate advantages and shrinking institutional demand. Dominic Bunning, head of G10 FX strategy at Nomura, warned that if the AI trade reverses, "whether the dollar can benefit as it has in the past is far less certain."

Early warning signals have already appeared in the past week: during the period when AI valuations came under pressure, safe-haven flows went noticeably to the yen and the Swiss franc rather than the dollar. Analysts believe the dollar is increasingly evolving from a traditional safe-haven asset into a risk-sensitive asset that is a bet on "American exceptionalism," and its performance under extreme stress scenarios is subject to considerable uncertainty.

Hot money floods in, and the dollar's risk profile quietly shifts

In recent years, foreign capital has bought U.S. mega-cap technology stocks, hyperscaler cloud-computing corporate bonds and power-grid infrastructure on a large scale, driven precisely by the excess-return expectations generated by the AI boom. This trend has made the dollar a concentrated bet on "American exceptionalism," underpinned by faster growth, higher interest rates and sustained foreign demand for U.S. assets.

Erik Nelson, head of global FX strategy at Wells Fargo, likened these inflows to the "hot money" common in emerging markets—capital dominated by institutional allocators that can quickly buy or sell once their judgment on U.S. growth, interest rates or technology valuations changes.

Kevin Ford, chief FX and macro strategist at Convera, noted that "when the AI trade is called into question, the correlation between the AI trade and the dollar becomes far more pronounced than before." Foreign inflows into U.S. equities have now reached a record high, while foreign direct investment lags behind, meaning a large share of the capital is portfolio investment that can be quickly reallocated rather than long-term strategic positioning.

The AI boom's boost to the dollar is transmitted largely through interest-rate expectations. Noah Buffam, FX strategist at CIBC Capital Markets, said, "The whole AI trade led to U.S. rates being repriced higher, which in turn drove dollar appreciation."

However, once this chain breaks, the consequences could hit the dollar simultaneously across multiple dimensions: first, if AI investment returns disappoint, downward revisions to growth expectations will force the Federal Reserve to cut rates, eroding the dollar's rate-differential advantage; second, slower domestic investment will puncture the "exceptionalism" narrative; third, the fading of institutional investors' demand for U.S. corporate bonds and equities will weaken the dollar's structural support.

Localized stress signals have already appeared in markets recently: credit default swap spreads of highly indebted emerging cloud-computing companies such as CoreWeave have widened sharply over the past few weeks and have spilled over into related stocks. Shaun Osborne, chief FX strategist at Scotiabank, noted that "from the credit default swaps, we can see signs of wear at the edges."

Lessons from the dot-com bubble

Historical experience shows that a stock-market decline alone is not enough to collapse the dollar. Nelson noted that after the Nasdaq peaked in March 2000, the dollar remained strong for nearly two years, and only when the collapse of companies such as WorldCom triggered turmoil in the U.S. credit market, combined with a global growth recovery and other factors, did the dollar finally break down.

However, this round of AI infrastructure buildout is more U.S.-centric than the dot-com era, so the vulnerabilities are more concentrated. Nelson's data show that the real trade-weighted dollar has been above its long-term average since 1973 for 12 consecutive years, the longest streak on record. Compared with 2000, foreign capital is more concentrated in equities and corporate bonds, while foreign direct investment is weaker. In addition, Washington currently carries a large fiscal deficit, unlike the fiscal surplus around the 2000 technology peak, leaving quite limited room for countercyclical stimulus.

It is worth noting that not all extreme scenarios are bad for the dollar. If the stress escalates into a systemic dollar liquidity crisis, the historical precedents of the 2008 financial crisis and March 2020 show that investors scrambling for dollars to meet dollar-denominated liabilities could create strong but short-lived dollar demand.

Key signal: U.S.-specific credit and growth stress

Nelson stressed that the key signal that would trigger a deep dollar adjustment is not whether technology stocks fall, but whether the stress escalates into "U.S.-specific credit and growth problems" and thereby changes market expectations for the Fed's policy path. Once that scenario materializes, the yen is most likely to be the biggest beneficiary.

Nelson said, "The sensitivity of global investors to a large-scale revaluation or selloff of the dollar is quite significant. Going into 2027, this is a vulnerability of the dollar worth continuing to watch." Some market participants believe that since April 2025, when Trump announced sweeping tariffs and triggered a sharp dollar slump, the dollar has once again become the core risk variable for global markets in the most important way. Risk disclosure and disclaimer

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