US FX WRAP: Dollar gains vs high-beta FX in risk-off trade; JPY outperforms as the preferred haven

USD was broadly firmer, supported by its haven nature alongside a bid in bonds as AI fears reached new heights, spilling into a broad sell-off across sectors. AI profitability concerns have persisted despite the initial midterm relief rally, as markets continue to weigh how far newly elected Democratic officials will go in slowing or pausing the AI data centre build-out. Despite the lower yield environment, the equity weakness extended across the international space, allowing the USD to find support amid the global risk-off. Elsewhere, claims data was little changed W/W, showing a continued low-hire, low-fire labour environment, while Q3 Nonfarm Productivity rose 3.6% (exp. 2.8%). From the Fed, Hammack discussed her hawkish dissent (in favour of a hike) at the last meeting, reiterating that inflation is moving in the wrong direction and arguing that policy needs to become restrictive in a gradual manner. Friday's NFP report is expected to show employment growth of 65k, accelerating from September's 29k, with the unemployment rate forecast to remain at 4.2%.

The BoE delivered a 25bps hike to 4.00%, with the vote a unanimous 9-0 in favour of tightening (exp. 7-2) and Mann pushing for a larger 50bps move. Cable briefly jumped to around 1.3480 on the announcement, but the gains faded after Governor Bailey cautioned that the hike does not necessarily mark the beginning of a tightening cycle, although he did suggest another hike is likely if the US/Iran war does not subside. GBP/USD ultimately ended marginally lower. EUR/GBP is slightly firmer at pixel time.

JPY was the preferred haven in today's AI sell-off, with USD/JPY falling below 158.00 to lows of 157.54 amid a supportive lower US yield backdrop. Japanese PM Takaichi said she will continue to cooperate with US President Trump to strengthen US-Japan ties.

AUD was the worst performer in G10 FX as souring risk appetite weighed on the high-beta currency. Meanwhile, EUR/NOK was little changed after the Norges Bank held rates as expected. The central bank noted that "it will likely be necessary to keep the policy rate elevated for a time, and we are prepared to raise the policy rate if needed".

MXN saw brief pressure in response to the Banxico rate decision, given the surprise 25bps cut to 6.25% despite expectations for a hold. There were two dissenters, where Borja and Heath voted to maintain rates. The MXN weakness pared swiftly however as the guidance implies rates on hold for the foreseeable future. "The Governing Board considers that maintaining the reference rate at the attained level for an extended period will support the convergence of inflation to its target and will be adequate to face the challenges posed by the external macroeconomic environment."