Key Takeaways:
The US dollar's recent strength masks a hidden vulnerability: its growing dependence on unhedged foreign AI investment flows.
Apollo Global Management's chief economist Torsten Slok warned the dollar faces significant downside risk if the artificial intelligence trade falters, as record foreign inflows into US equities remain largely unhedged against currency swings.
"The dollar has developed an implicit dependence on the AI trade," Slok wrote in a report Monday. "If AI returns don't materialize as quickly as anticipated, the capital inflow reversal could trigger a painful repricing of both equities and the currency."
Foreign net inflows into US stocks have reached a 12-month rolling record in 2026, driven by international investors chasing AI opportunities unavailable in their home markets, Treasury data show. Most of those investors have not hedged their currency exposure, Slok said, because US interest rates — currently about 140 basis points above the euro zone's — make buying dollar protection prohibitively expensive. The Bloomberg Dollar Spot Index has gained 1.4% year to date, with the greenback near a one-year high.
The risk is that a slowdown in AI investment — or a reassessment of its payoff timeline — could trigger simultaneous selling in US stocks and the dollar, amplifying market volatility. While markets price a Federal Reserve rate hike as soon as September, Slok argued that interest rate support may not fully offset capital outflows if foreign investors unwind their unhedged equity positions.
Global pension funds have already begun adjusting their dollar exposure. Hedge ratios at some Danish funds have fallen 5 percentage points over the past year, while Canadian funds have reduced theirs by about 1 point, according to a Wells Fargo analysis. The reversal is easing pressure on the greenback and undermining the briefly popular narrative that investors were moving away from the dollar in a "sell America" trade.
"The hedging impulse has faded — those trends have since gone into reverse," said Erik Nelson, global head of FX strategy at Wells Fargo.
The dollar's shifting correlation with US equities has also made hedging less urgent for foreign investors. During last year's "Liberation Day" tariff turmoil, the dollar failed to exhibit its typical safe-haven behavior and tumbled alongside stocks — a double whammy for unhedged portfolios. This year, the greenback has regained its haven status, particularly during the risk-off episode that followed the US-Iran conflict.
"Higher US real interest rates make dollar investments more attractive, but also make currency hedging more expensive, so big investors have chosen to leave more of their US stock holdings unhedged," said Garth Appelt, head of FX and emerging markets derivatives at Mizuho Americas.
The AI Employment Paradox
The warning about dollar vulnerability comes even as Apollo's own research suggests AI is boosting employment rather than destroying it. A study by financial technology firm Ramp, analyzing data across 21,559 US firms, found that AI adoption increases workforce size by 10% over two years, with entry-level positions rising about 12% at high-intensity adopters.
Slok described this as Jevons paradox playing out in real time: as AI tools lower the cost of professional tasks, the addressable market expands, driving demand for implementation experts and pushing up salaries for AI specialists. Weekly ADP employment data shows "zero evidence of job losses because of AI," according to the analysis.
"The AI spending boom is stoking both employment and inflation," Slok said. "Cheaper inputs don't shrink industries. Instead, AI is going to increase both productivity and employment."
What's at Stake for the Dollar
For now, the dollar sits on firm footing. The appointment of Kevin Warsh as Fed chair has eased concerns about central bank independence, and the hawkish rate outlook continues to attract capital. But the concentration of foreign flows in a single thematic trade — AI — creates what Slok called a "hidden fragility" in the currency's support structure.
"Much of the dollar's trajectory will still depend on the continued success of the US AI investment story," said Alex Moloney, head of macro discretionary at Insight Investment. "Should investors' expectations prove too rosy, funds might review their hedging needs."
"You're still in a situation where dollar rates, dollar carry, and dollar equity returns are high," Nelson said. "So until that changes, we're still in a generally strong dollar world."
This article is for informational purposes only and does not constitute investment advice.
