By Karen Brettell
NEW YORK, Oct 20 (Reuters) - The US dollar slipped on Tuesday in line with falling oil prices and longer-dated Treasury yields as traders evaluated the impact of rising tensions in the US war with Iran and the durability of strong capital inflows into US AI companies.
Oil prices slipped after touching a five-month high as traders weighed a meeting between the Iranian president and Pakistan's army chief, a key US-Iran mediator, against continued Houthi attacks on Saudi infrastructure
and reports of vessel attacks in the Gulf.
Higher oil prices have raised concern about inflation staying higher for longer. The dollar jumped last week after data showed that US consumer price inflation accelerated in September.
But that move was soon overtaken by concerns over AI.
"Energy prices pushing higher is good for the dollar, but if it gets to the point where rates go so high that the AI trade blows up, suddenly it has a negative impact," said Dominic Bunning, head of G10 FX strategy at Nomura. "There's a threshold there and we're playing around with that at the moment."
Strong capital inflows into AI stocks in the US have supported the dollar. Higher interest rates, driven partly by growth and inflation expectations tied to the sector, have helped.
But concerns over AI were renewed earlier on Tuesday as shares in South Korean AI services firm Elice Group plunged 32% in their Seoul market debut.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.25% to 101.71, with the euro up 0.22% at $1.1235.
Traders remained wary of the euro despite Tuesday's gains as France faces widespread protests and a worsening fiscal picture.
France will reinforce police with troops and mount a huge security operation for more protests planned on Saturday, the government said on Tuesday, acknowledging failures in its response to last weekend's violence.
"The worries in France are not going away anytime soon," said Tommy von Brömsen, FX strategist at Handelsbanken. "The bearish view on France will stay for a while longer, and there's much more euro weakness to be priced in."
Britain's pound strengthened 0.59% to $1.338 after labour market data showed a resilient jobs market, the latest batch of data from the UK that surprised to the upside.
"The risk is that a resilient labour market gives the Bank of England both the room and the reason to raise interest rates again," said Lale Akoner, global market strategist at eToro. "Sterling could benefit from rising rate expectations."
Markets are almost fully pricing in a 25-basis-point rate hike by the Bank of England at its next meeting on November 5, according to LSEG data.
STRONG JAPANESE BOND AUCTION
The yen jumped after an auction of longer-dated Japanese government bonds (JGBs) drew record demand.
"The record 20-year auction is a strong signal that sidelined cash is finally coming back," said Masahiko Loo, senior fixed-income strategist at State Street Investment Management in Tokyo. "JGBs are also starting to look like a relative haven from Europe's political and fiscal volatility, particularly around France."
The Japanese yen gained 0.21% to 158.14 per dollar.
Elsewhere, the Canadian dollar rose 0.34% to 1.406 per US dollar, its strongest level in almost a month, after Alberta residents voted by a large majority to remain part of Canada in the province's first-ever referendum on separation.
(Reporting by Karen Brettell, Samuel Indyk and Gregor Stuart Hunter; Editing by Xevi Fontdegloria and Nick Zieminski)
