Pound Heads for First Weekly Gain in Seven Weeks as Dollar Falters on AI Stock Jitters

The British pound is poised to break a seven-week losing streak against the U.S. dollar, lifted by broader weakness in the greenback as investor caution grows around high-flying U.S. technology stocks.

Sterling climbed 0.43% against the dollar to $1.3331 in Friday trading, putting it on course for a weekly gain of about 0.7%, according to market data. The move would mark the currency's strongest close since September 22.

Dollar Weakness Drives Currency Moves

The pound's advance appears to be driven by external factors rather than a fundamental shift in the UK's outlook, as the euro also gained against the dollar. Analysts attribute the dollar's slip to investor unease over a potential correction in the artificial intelligence (AI) sector, which has fueled a rally in U.S. equities.

"The big takeaway this week has been the recovery of the long-end of the US Treasury market," said Chris Turner, global head of markets at ING. He noted that investors appeared to be using long-dated Treasuries as "a middling hedge against a correction in the AI trade."

Conflicting Signals in U.S. Markets

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This demand for the relative safety of government bonds has pressured long-term yields, contributing to a flattening of the U.S. Treasury yield curve. The spread between 2-year and 10-year notes has narrowed by nearly 20 basis points this week.

The move comes despite persistent inflation signals. According to ING, U.S. producer prices for September "blew away consensus," which has kept short-dated yields supported and reinforces the view that the Federal Reserve is "applying the brakes." Turner suggested that barring a major downturn in AI stocks, the dollar will likely "consolidate near recent highs."

UK Domestic Picture Remains Mixed

While the pound's rally is primarily a dollar story, some domestic data offered modest support. The UK economy grew more than forecast in August, with a jump in computer programming activity providing fresh evidence of AI's contribution to growth.

However, potential fiscal headwinds loom. A report from The Guardian indicated the UK government is considering raising taxes on banks in its upcoming budget. This, combined with sharply rising government borrowing costs, adds a layer of uncertainty to the UK's economic outlook.