AI Reshapes the Dollar's Trend: Three Stages, Three Impacts

Bank of America believes that AI is rapidly evolving from a technological concept into a key macroeconomic variable.

According to news from the trading desk, on November 5th, Bank of America published a research report stating that understanding how AI affects the trend of the global reserve currency, the US dollar, has become a necessary course for future asset allocation. The impact of AI on the dollar is not simply positive or negative, but presents complex and phased characteristics. Specifically:

• Short-term (capital expenditure phase): The dollar is supported. The massive capital investments triggered by AI are boosting US GDP, providing justification for the Federal Reserve to maintain a hawkish stance, which indirectly benefits the dollar.
• Medium-term (technology application transition phase): The dollar faces pressure. The implementation of AI technology will first impact the labor market; if it leads to a rise in unemployment, it will force the Federal Reserve to shift to a loose monetary policy, putting downward pressure on the dollar.
• Long-term (productivity transformation phase): The outlook depends on the final outcome. If AI primarily brings about deflationary effects, it will lower interest rates, negatively impacting the dollar; however, if AI successfully ignites a new round of productivity revolution, it will raise the real return rates in the US, attracting global capital, which will strongly boost the dollar.

Phase One: Capital Expenditure Boom Indirectly Supports the Dollar

A common misconception is that the US's leading position in AI and the surge in related stocks will automatically translate into a strong dollar.

The report points out that although AI concept stocks experienced a surge in the second and third quarters of 2025, the dollar index has basically maintained a range-bound fluctuation and did not benefit from this.

(Although the development of AI stocks in the second and third quarters is closely related to corporate capital expenditure, the prosperity of this technology sector this year has not directly had a positive impact on the dollar.)

Historically, the rolling beta coefficient of the dollar index and technology stocks (represented by the Nasdaq index) has long been flat or even negative. When technology stocks rise, the dollar usually tends to weaken. Although this relationship briefly turned positive after the Trump tariffs shock in April this year, it quickly returned to historical norms.

The main reason behind this is that the short-term fluctuations in AI stock prices are not the dominant force driving the dollar's trend.

Despite the divergence between technology stock prices and the dollar's trend, the capital expenditure boom triggered by AI has "undoubtedly" provided support for the dollar.

The report cites its economists' analysis, indicating that AI investment alone could contribute 1.2 percentage points and 1.3 percentage points to the GDP growth of the US in the first and second quarters of 2025, respectively.

(This year's investment in artificial intelligence and related technologies has become a key factor driving US economic growth.) This contribution mainly comes from investments in software and hardware. The transmission path is clear: AI capital expenditures boost GDP, which in turn generates a wealth effect that supports consumer spending to some extent, subsequently maintaining sticky inflation in the service sector, ultimately weakening the urgency for the Federal Reserve to cut interest rates, keeping the dollar at a higher level than expected.

Bank of America believes that as long as the AI investment cycle continues, it will be a fundamental factor supporting the resilience of the dollar.

Phase Two: Labor Market Risks and Short-Term Pressure on the Dollar

When AI shifts from an investment concept to large-scale application, its impact's "first order" will be the labor market, which poses a clear short-term risk to the dollar.

The report observes that the U.S. labor market has shown characteristics of "low hiring, low layoffs," reflecting companies' cautious attitude towards adding entry-level positions in the face of the automation wave.

Data shows that the unemployment rate among the 20-24 age group is disproportionately rising, significantly exceeding that of the core labor force aged 25-54. Meanwhile, layoff news from major companies like Amazon, UPS, IBM, and Target also indicates that an AI-driven wave of unemployment may be imminent.

(The unemployment rate among young people aged 20 to 24 is rising significantly higher than that of middle-aged workers)

The report points out that any data confirming the intensification of AI-driven layoffs will significantly increase the downside risk for the dollar, as it will directly affect the Federal Reserve's easing path and the endpoint for interest rate cuts.

Phase Three: Long-Term Showdown—Productivity Revolution vs. Deflationary Pressure

Bank of America analyzes that after the labor market endures the pain period, the long-term impact of AI on the dollar will depend on two competing forces: deflationary effects and productivity enhancement:

Deflationary Path (Bearish for the Dollar):

• If the large-scale application of AI leads to significant, widespread deflationary pressure, especially when combined with rising unemployment rates, it will force the Federal Reserve to adopt extremely dovish monetary policies.
• Against the backdrop of the U.S. already being one of the highest-yielding currencies in the G10, this will trigger a sustained depreciation of the dollar.

Productivity Path (Bullish for the Dollar):

• AI ultimately becomes a powerful tool for enhancing productivity, creating a more vibrant economy. In this case, leaps in productivity will push up the real neutral interest rate, attracting more capital investment.
• History can serve as a reference; during the period from 1995 to 2002, the enhancement of U.S. productivity was accompanied by a significant appreciation of the dollar, as global capital chased higher real returns in the U.S.

(The improvement in productivity is positively correlated with the trend of dollar appreciation) The long-term fate of the dollar will ultimately depend on whether AI is a "killer of efficiency" or a "engine of growth."

Historical Reflection: Why the 2000 Dot-com Bubble is an "Imperfect Analogy"

When discussing the tech boom, people naturally think of the dot-com bubble of 2000. The report considers this an "apt but imperfect analogy."

The key differences are:

• Different protagonists: In 2000, the protagonists were numerous unprofitable startups; today, they are tech giants (Hyperscalers) with strong profitability.
• Different capital flows: In 2000, there was a significant surge in the proportion of foreign direct investment (FDI) to GDP; in the current AI boom, the growth scale of FDI is far less than it was back then.

(The 2000 U.S. tech bubble was less about the development of AI technology and more about the increase in foreign direct investment.)

• Different dollar response patterns: Around 2000, the dollar remained strong during both the rise of tech stocks and the early stages of the bubble burst, benefiting from capital inflows and safe-haven demand. However, the report warns that this time, due to a large number of overseas investors holding U.S. assets without adequate hedging, the dollar may be "more vulnerable" in the face of market shocks, and its safe-haven status is not unassailable.

(When the 2000 internet bubble burst, the dollar exchange rate was not affected; the turning point in the foreign exchange market occurred more than a year later.)

In summary, the report emphasizes that the impact of AI on the dollar is a dynamically evolving process. Investors should not simply equate AI with a strong or weak dollar but should construct a multi-stage analytical framework, closely monitoring the evolution of three core variables: capital expenditure, labor market, and productivity, in order to accurately grasp the pulse of the dollar amid the wave of AI reshaping the global landscape