The dollar's bad day: hot CPI sold stocks, then the AI trade took the wheel

The spike that didn't hold

September's hot inflation print hit markets like a flash crash in slow motion. The S&P 500 fell 1.2% overnight and the Nasdaq dropped 1.9% as chipmakers sold off again, Treasuries faced selling pressure, and the implied odds of an October Fed hike jumped from about 20% to over 50% before settling at 35% by the session's end, according to Westpac's morning report. European equities bucked the weaker U.S. trend. Brent crude held near $106 a barrel, up 0.3%, on ongoing disruptions in the Strait of Hormuz. m:…8208

But the dollar could not hold the gains inflation handed it. The DXY index fell more than 1% from its post-CPI peak as long-end Treasury yields slid about 10 basis points, and Scotiabank's FX desk notes that hike risk for the October 28 FOMC meeting has been pared back to 7 basis points. The yen, the euro, and the Swiss franc each rose 0.4% to 0.5% on the session. The Canadian dollar lagged its peers, while the Australian dollar underperformed on weaker-than-forecast jobs data, nearing 0.6900 support. m:…8809

The AI trade takes over

What took the dollar's momentum, per ING's FX desk, was not more inflation data; it was the AI trade. The bank says the market is increasingly sensitive to the debt sustainability of high-yield AI infrastructure providers, with CoreWeave's 2032 bonds trading at 78 cents on the dollar. The Swiss franc is outperforming as a safe haven on narrower interest-rate differentials, while the currencies most tied to AI chip shipments, the Taiwan dollar and the Korean won, are taking the heaviest selling pressure. m:…2779

Emerging Europe had its own motion. Romania moved closer to ending its political deadlock with the Social Democrats joining Luca Niculescu's cabinet, a development ING expects to stabilize the leu and reduce investment-grade rating risks. Poland's final September inflation was revised to 4.1%, with government fuel-price caps reducing headline inflation by 0.6 to 0.7 percentage points; the National Bank of Poland is expected to discuss rate hikes no earlier than December. m:…2779

What the desks expect

A second ING note reaches a different conclusion on direction: the dollar story is improving. It sees EUR/USD trading between 1.10 and 1.15 over the next three to six months, with limited scope for a near-term euro rebound, the Federal Reserve taking policy into mildly restrictive territory, and the dollar playing its safe-haven role again. U.S.-eurozone rate differentials are at their widest since 2022, and the market has priced three Fed hikes over the next twelve months. The caveats: foreign investors' FX hedge ratios on U.S. assets are back to very low levels, French debt concerns persist until April's presidential elections, and potential White House intervention in financial or trade policy is a key risk. m:…0737

BlackRock's Rick Rieder offers the structural read: the economy is bifurcated, with growth concentrated in AI-related capital expenditure and rate-insensitive services while interest-sensitive sectors face recessionary conditions. Inflation, he notes, is increasingly driven by acyclical components like energy, insurance, and healthcare that respond weakly to tightening. His numbers: a diversified fixed-income portfolio can now yield more than 7% with under three years of duration and an average A- credit rating; the Fed has raised the policy rate to 3.75%-4.00%; the 2026 median dot plot implies two more hikes to 4.125%; computers and peripherals are 1% of GDP but generated 27% of recent growth; U.S. debt-to-GDP is projected to reach 120% by 2036. m:…2366

Scotiabank notes sterling is firmer after UK manufacturing rose 1.2% in August, well above expectations of zero growth, with GDP up 0.1%. Attention now turns to producer prices: headline PPI is forecast to rise 0.6% in September with core gains at 0.3%, the next input into core PCE expectations. Rieder's household numbers underline why the Fed's path matters beyond markets: qualifying for a median-priced home now requires $125,000 of income, the average first-time buyer is 40, and the 90-day credit card delinquency rate sits at 12.9% against 4.1% unemployment. m:…8809 m:…2366