Nomura Warns: AI Capital Retreat Is the Dollar’s Biggest New Risk

Nomura Warns: AI Capital Retreat Is the Dollar’s Biggest New Risk

TREE NEWS reports: The massive inflow of AI-driven capital into U.S. assets is quietly reshaping the dollar’s safe-haven status, and a reversal could pressure the currency on three fronts simultaneously. In a research note, Bunning cautioned that if the AI trade unwinds, “whether the dollar benefits as it has in the past is far less certain.” Early warning signs emerged last week: during a period of stress in AI valuations, safe-haven flows went notably to the Japanese yen and Swiss franc rather than the dollar.

Hot Money Inflows Alter the Dollar’s Risk Profile

In recent years, foreign capital has poured into U.S. mega-cap technology stocks, hyperscaler corporate bonds, and power-grid infrastructure, drawn by the excess returns promised by the AI boom. This has made the dollar a concentrated bet on “American exceptionalism,” underpinned by faster growth, higher interest rates, and persistent foreign demand for U.S. assets. Wells Fargo’s global FX strategy head Erik Nelson likens these inflows to the “hot money” common in emerging markets—institutionally driven capital that can be quickly bought or sold if perceptions of U.S. growth, rates, or tech valuations change. Convera’s chief FX and macro strategist Kevin Ford noted that “when the AI trade is questioned, the correlation between the AI trade and the dollar becomes far more significant than before.” Foreign inflows into U.S. equities are at record highs, while foreign direct investment lags, meaning much of the capital is portfolio investment that can be rapidly reallocated rather than long-term strategic positioning.

AI’s Lift to the Dollar Could Reverse on Three Fronts

The AI boom has boosted the dollar largely through interest-rate expectations. “The whole AI trade led to a repricing higher in U.S. rates, which in turn drove the dollar up,” said CIBC Capital Markets FX strategist Noah Buffam. If that chain breaks, the consequences could hit the dollar from multiple angles. First, if AI investment returns disappoint, downgraded growth expectations would force the Federal Reserve to cut rates, eroding the dollar’s yield advantage. Second, slower domestic investment would puncture the “exceptionalism” narrative. Third, fading institutional demand for U.S. corporate bonds and equities would weaken structural support for the dollar. Market stress signals are already visible: credit default swap spreads for highly leveraged cloud companies such as CoreWeave have widened sharply in recent weeks and have spilled over into related equities. “From the CDS, we can see signs of fraying at the edges,” said Shaun Osborne, chief FX strategist at Scotiabank.

Lessons from the Dot-Com Bubble

History shows that a stock market decline alone is not enough to crash the dollar. Nelson notes that after the Nasdaq peaked in March 2000, the dollar stayed strong for nearly two years, only breaking down after the collapse of companies like WorldCom roiled U.S. credit markets and global growth recovered. However, the current AI infrastructure build-out is more U.S.-centric than the dot-com era, concentrating vulnerabilities. Nelson’s data show 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 FDI is weaker. Moreover, Washington now carries a large fiscal deficit, unlike the fiscal surplus around the 2000 tech peak, leaving little room for counter-cyclical stimulus. Not all extreme scenarios are dollar-negative: if stress escalates into a systemic dollar liquidity crisis, the precedents of 2008 and March 2020 show investors scrambling for dollars to meet dollar-denominated liabilities, creating strong but short-lived demand.

Key Signal: U.S.-Specific Credit and Growth Stress

Nelson emphasizes that the trigger for a deep dollar adjustment is not whether tech stocks fall, but whether stress evolves into a “U.S.-specific credit and growth problem” that shifts expectations for the Fed’s policy path. If that happens, the yen is likely to be the biggest beneficiary. “Global investors’ sensitivity to a large-scale dollar revaluation or sell-off is quite significant. Going into 2027, this is a vulnerability for the dollar worth monitoring,” Nelson said. Some market participants believe that since April 2025, when President Trump’s broad tariffs triggered a dollar slump, the dollar has re-emerged as a central risk variable for global markets in the most important way.

Key Takeaways for Investors

• Dollar risk is now tied to AI sentiment: The dollar’s safe-haven appeal is increasingly conditional on the AI trade holding up. Investors should monitor AI-related credit spreads and equity valuations as leading indicators for the currency.
• Watch U.S.-specific credit stress: The key trigger for a dollar sell-off is not a tech stock decline per se, but a broadening of stress into U.S. credit markets and growth expectations.
• Yen and Swiss franc may outperform in risk-off: Recent flows suggest that in AI-related stress, traditional safe havens like the yen and Swiss franc may attract demand before the dollar.
• Fiscal constraints limit policy response: With large deficits, the U.S. has less room for counter-cyclical stimulus than in 2000, potentially amplifying downside risks for the dollar in a growth scare.
• Systemic liquidity crisis is the exception: A severe global dollar funding squeeze could still trigger short-term dollar strength, as in 2008 and 2020.