Doubts about the sustainability of the AI spending boom are triggering a chain reaction in global currency markets. Safe-haven funds are flowing into the Japanese yen, US Treasury yields are falling sharply, and the dollar index is hovering near a three-week low. Even with Brent crude oil still hovering above $110, market concerns about economic growth have clearly outweighed anxieties about inflation.

Risk aversion intensifies, and the yen is poised to record a weekly gain.

The Japanese yen is poised to post a weekly gain on Friday (October 23). As risk aversion spreads across global markets, US Treasury yields have been significantly suppressed, while the dollar index hovers near a three-week low reached earlier in the week. The yen strengthened as much as 0.4% on Friday, reaching 156.08 yen to the dollar, its strongest level in over a month, before giving back gains in the afternoon to around 156.89, but is still on track for a 0.7% weekly gain. "The yen is being bought as a hedge, not as an asset allocation," said Shoki Omori, chief fixed income strategist for Japan at Deutsche Bank. He added, "We haven't seen Japanese institutional funds flowing back home, and carry trades against the dollar remain intact." Deutsche Bank expects the dollar/yen exchange rate to fluctuate between 155 and 159 ahead of the Bank of Japan's policy meeting.

Inflation surpasses 2% target for the first time in nine months, fueling expectations of an interest rate hike.

Data released on Friday showed that Japan's core consumer inflation exceeded the central bank's 2% target for the first time in nine months in September, indicating expanding price pressures and providing justification for a near-term interest rate hike. Economists surveyed generally expect the Bank of Japan to hold rates steady at its policy meeting next Friday, followed by a 25-basis-point hike at its December meeting. In addition to the Bank of Japan, investors are also preparing for policy decisions from the Federal Reserve and the European Central Bank next week, with the market widely expecting both central banks to keep interest rates unchanged in October.

AI concerns resurfaced, putting downward pressure on US Treasury yields.

The dollar index, which measures the dollar's performance against a basket of currencies, edged higher around 101.64, after hitting 101.44 on Thursday, its lowest level this month. The yield on the 10-year U.S. Treasury note hovered around 4.9674%, near a one-month low. Thursday's sell-off in stocks, fueled by renewed concerns about the sustainability of the AI boom, actually enhanced the appeal of Treasuries as a safe-haven asset. This benchmark yield broke through the psychologically significant 5% level last month and had mostly remained above that level until this week; the sharp decline in yields has also helped lower market expectations for interest rate hikes next year. Analysts at ING stated, "Whether yields can stay below 5% is another question." They expect the 10-year yield to eventually rise back above 5%, taking into account inflation, fiscal deficits, and the AI trend. He said, "The risk-averse environment has eased the pressure on the Fed to raise rates next week, but even so, we will not increase duration at this moment, at least not now." Meanwhile, Brent crude futures have broken through $114 a barrel, extending the previous trading day's 2.88% gain, as Houthi attacks on Saudi Arabia exacerbated market concerns about further disruptions to energy supplies in the region.

Conclusion

Amidst intertwined concerns about AI, geopolitical instability, and fiscal anxieties, the yen has become a safe-haven asset for those seeking to mitigate AI risks. With the Federal Reserve, the European Central Bank, and the Bank of Japan all issuing policy decisions next week, the current sentiment-driven foreign exchange market may be poised for a new directional shift. USD/JPY Daily Chart Source: FX678 At 14:41 Beijing time on October 23, USD/JPY was trading at 157.07/12.