The dollar is rocketing once more on bets that the US may be the only major economy able to absorb another big monetary squeeze as inflation anxiety reignites.
With US bond markets shut for Veterans Day on Wednesday after the previous day's inflation jolt, the dollar reflected the resulting Federal Reserve rethink.
After posting its biggest two-day rise in five months, the dollar index hit its highest level since US President Donald Trump's tariff shock of last year. The dollar's rise to 19-month highs against the euro and two-month highs against Japan's yen drove the move.
Futures markets put the chance of the half-percentage-point hike suggested by Fed Governor Christopher Waller at just 12%. But beyond December, rate markets have added back another quarter point over the year ahead.
Whether other central banks can match that re-pumped trajectory is the big question.
With core inflation rates lower elsewhere, economic growth softer, and less of a spur from the AI investment boom, the hope for other major central banks had been that they could sidestep more tightening if the US-Iran war de-escalated and energy prices gradually subsided.
Or more simply: does the AI spending splurge both exaggerate the US inflation problem relative to other countries and give the Fed more latitude to deal with the problem?
Both the dollar and moves in relative two-year government bond yield spreads since Tuesday's US consumer price index (CPI) report suggest that's the direction of thinking. Those two-year spreads widened by up to 15 basis points against euro zone and Japanese government benchmarks.
Relative core inflation pictures certainly show different levels of underlying heat.
Annualized rates of US core CPI inflation excluding food and energy prices, as well as the Fed's favored core personal consumption expenditures (PCE) inflation gauge, are now running well in excess of 3%, while euro zone and Japanese equivalents are still just above 2%. Central banks in Europe and Japan clearly have more space to stand pat if energy prices do indeed wane from here.
One way currency strategists look at the issue is through the productivity lens. As US productivity growth appears to be picking up, with or without the aid of AI, the economy may well be able to sustain a brisk expansion even as the Fed gets tough to rein in inflation.
Standard Chartered's Steve Englander and Dan Pan point out that US productivity growth for non-financial companies in recent years has been close to the pace seen during major episodes of productivity gains over the last 65 years.
They add that even if there's no clear evidence yet of a US productivity boost from the AI boom per se, the numbers suggest profitability is rising regardless. This is important for the dollar, as the non-financial corporate sector attracts most portfolio flows and mergers and acquisitions.
"Yesterday's CPI firmed up US policy rate expectations but didn't do damage to optimism or growth expectations," they wrote, adding that was largely a function of the productivity picture. "Run down your list of currencies and ask how many belong to economies that can deal with that kind of rates move and you will sort out the winners and losers."
What might sustain that US advantage comes back to the AI promise to ramp up earnings per worker, something Fed Chair Kevin Warsh and others assume will only really kick in on a medium-term horizon, if at all.
JPMorgan economist Joseph Lupton addressed that question this week and was less convinced of either the sustainability of the recent pickup in productivity growth or the degree to which AI was yet a direct factor.
Lupton sketched out the typical scenario that has played out around prior tech booms, where the investment surge initially strains existing labor and capital resources and lifts marginal costs and inflation.
In that scenario, the neutral rate of interest rises initially and the Fed now seems to be acknowledging that it needs to lock on to that higher level to keep inflation in check.
"Rising neutral rates often seem at odds with a positive technology shock, which is ultimately disinflationary," wrote Lupton.
"However, before the returns on investments arrive, investment is needed. Households that want to spend more via the wealth effect need to be incentivized to still save some of their income to fund the capex boom. This incentive comes from an equilibrium rise in the neutral rate of interest."
While an eventual AI productivity boost should allow the Fed to take its foot off the brake and allow the dollar to feed off the broader growth story, there is also an argument that the dollar is already drawing support from that story via elevated equity prices that already price those returns years ahead.
Sequencing the impact is already proving to be a tricky balancing act for the Fed. It may also be a high-wire act for the currency and wider financial markets.
The opinions expressed here are those of Mike Dolan, a columnist for Reuters.
