The dollar climbed Tuesday as a global AI stock rout triggered risk aversion while September Fed hike odds held near 80% despite falling oil, keeping the greenback supported ahead of the FOMC decision.
The dollar pushed higher Tuesday, driven by a sharp selloff in global AI-related stocks and persistent expectations the Federal Reserve could still raise rates in September.
Asian equity markets absorbed the worst of the selling. South Korea's KOSPI tumbled 10.84%, its largest daily loss since March 4, after plunging as much as 11.3% intraday. The move triggered a market-wide circuit breaker. The index briefly fell below 6,000 for the first time since April. Japan's Nikkei 225 lost 3.95%, ending at its weakest close in more than two months.
The semiconductor sector took the heaviest blows. SK Hynix slid 14.7% after its ADRs posted record lows in New York. Samsung Electronics suffered its biggest daily decline since 2008, falling 14.4%. Japanese AI-related suppliers also fell sharply. Kioxia Holdings dropped as much as 18%. Tokyo Electron, Disco, Nikon and Murata Manufacturing all lost more than 9%.
The selloff reflects growing investor concern over Nvidia's role in the AI industry. Rather than simply supplying chips, Nvidia is increasingly seen as helping finance the companies buying its hardware. That "circular financing" model has revived memories of vendor-financing practices from the dot-com boom. It raises questions about whether parts of the AI investment cycle depend on self-funded demand. Those concerns triggered a broader reassessment of AI valuations after months of extraordinary gains.
If risk aversion explained the initial move into the dollar, interest-rate markets provided a second source of support. Brent crude slid below $85 after last week's surge above $100. Yet traders have shown little willingness to unwind expectations for another Fed hike. Diplomatic developments pointed toward de-escalation. Iranian Foreign Minister Seyyed Abbas Araqchi discussed regional developments with Saudi Arabia and Oman. President Donald Trump said Washington and Tehran were engaged in "very friendly negotiations."
Normally, a collapse in oil prices would ease inflation concerns and reduce expectations for tighter monetary policy. Instead, September Fed hike odds implied by futures remain around 80%, barely changed from earlier in the week. That is still above the level before the Middle East conflict intensified. The stability of those expectations despite oil's decline suggests markets believe the inflationary effects of last week's price spike have not yet run their course. Higher energy costs filter through transport and production with a lag. A drop in spot crude today does not immediately erase the inflation impulse already created.
That backdrop continues to provide fundamental support for the dollar. Traders remain cautious ahead of Wednesday's FOMC decision. The greenback has yet to break convincingly higher against either the euro or the yen. Gains against sterling, the Swiss franc and the Canadian dollar have also been modest. Markets will likely need stronger confirmation from the Fed before fully embracing another round of dollar buying. That could come through a distinctly hawkish statement, Chair Kevin Warsh's guidance, or dissenting votes in favor of an immediate hike.
Among major currencies, the Canadian dollar outperformed as it recovered part of Monday's oil-driven losses. The dollar ranked second and remains the week's strongest performer overall. The Australian dollar underperformed as the regional AI-led equity rout compounded caution ahead of Wednesday's Australian CPI report. The yen and Swiss franc also lagged despite the broader risk-off tone. Elevated US rate expectations continued to favor the dollar over traditional low-yielding defensive currencies.
The Fed meets Wednesday. Markets will watch for any dissent or guidance on September.
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