Dollar set for weekly loss as Fed hike bets fade, AI clouds outlook

By Laura Matthews and Stefano Rebaudo

Oct 16 (Reuters) - The dollar weakened on Friday, heading for its first weekly fall in more than a month against the euro and the yen, amid fading expectations for a Federal Reserve rate hike and lingering concerns from an AI-driven equity selloff.

Hotter-than-expected consumer and producer price readings initially rattled markets this week, but comments from Fed officials signaling no urgency to tighten policy further helped stabilize Treasury yields and eroded support for the dollar.

AI stocks fell sharply this week and the stress spread to parts of the credit market as investors who have crowded into bets all along the supply chain worry data centre operators might not manage to be profitable in time to pay their debts.

"Since mid-June, with a hawkish FOMC, interest rates have been driving the dollar, and now it looks like concerns about the sustainability of AI is offsetting that," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York.

The dollar index , which measures it against six major peers, fell 0.42% to 101.61 and was set for a 0.6% weekly drop.

The pound and the Swiss franc led gains against the dollar this week, with the latter buoyed by safe-haven demand and expectations that even in a lower-rates environment Switzerland is unlikely to cut policy rates below the current zero level.

Sterling rose 0.60% to $1.3353 and was up 0.92% on the week, while the dollar fell 0.48% against the Swiss franc to 0.8228, leaving it down 0.92% for the week. The franc has gained more than 1.4% in the last two sessions.

Markets assign an 85% probability to the Fed keeping rates unchanged later this month, the CME FedWatch Tool shows.

"I don’t think there is enough support in (the) committee, particularly from the governors, for a rate hike in October. It still leaves December an unanswered question and there is a lot to happen between now and then," said John Velis, Americas macro strategist at BNY in New York.

EURO AREA FISCAL RISKS STILL IN FOCUS

Fiscal risks in France remained in the background after the jump in the French debt risk premium in early October.

The euro rose 0.33% to $1.1255 after climbing 0.56% on Thursday in its biggest daily rise in two months, putting it on track for a 0.48% weekly gain.

Investors expect US President Donald Trump to steer clear of any escalation in the Middle East or Ukraine, as a broader conflict could hurt his standing ahead of midterm elections by fuelling inflation.

Against the yen the dollar weakened 0.12% to 157.79, leaving the Japanese currency on track for a 0.33% weekly rise after dropping for four consecutive weeks as the Iran conflict supported the greenback.

Higher oil prices tend to boost the dollar while weighing on energy-importing currencies such as the euro and yen.

BOJ Governor Kazuo Ueda on Friday reiterated the risks of underlying inflation overshooting the central bank's 2% target.