Markets had been preparing for France's fiscal turmoil to spread to the rest of the world. However, the real heat came not from Paris, but from the semiconductor sector.

Semiconductor Index Performance

The global AI trade is beginning to unravel. The Philadelphia Semiconductor Index has fallen more than 7% from its high this month amid a sell-off in chipmakers driven by concerns about competition from China and excessive valuations.

For now, this is more of a headwind for the greenback. EUR/USD is rising because the strength of the US economy is too closely tied to productivity gains from AI, and doubts about this trend directly weigh on the dollar. Only if the sell-off develops into a broader flight from risk could the dollar benefit as a safe-haven asset. Its dependence on the AI theme is precisely what makes the situation unfavorable for the greenback. Deutsche Bank believes that the main systemic risk for markets next year will not be a fiscal crisis in France, but a disruption to the AI ecosystem. The bank cites an estimate by the Brookings Institution suggesting that companies will need to generate more than $3.5 trillion in annual revenue by 2032 to recoup their investments in data centers.

Fed Governor Christopher Waller views France's fiscal tensions as a warning sign for governments that spend excessively. However, he considers these risks less relevant to the United States because of its stronger economic growth.

Global Bond Yield Performance

According to Christopher Waller, he is not concerned about rising yields driven by strong economic growth, whereas an increase fueled by inflation fears is a different matter. Demand at US Treasury auctions has not yet indicated concerns about the deficit, and fiscal dominance—that is, monetary policy being driven by the government's financing needs—has not yet taken hold in the United States.

Goldman Sachs does not rule out a tactical recovery in EUR/USD. The sell-off in the single currency has been more severe than fundamentals justify, while positive drivers for the dollar are unlikely to maintain the same momentum. Fiscal problems have affected the yen and the pound at various times, not just the euro, leaving room for a tactical recovery.

Thus, the dollar is currently caught between two opposing narratives. Weakness in the AI theme is pushing EUR/USD higher, while concerns about France's fiscal deficit continue to favor the greenback. However, if Deutsche Bank is correct, the real danger for the dollar lies ahead, as a disruption to the AI ecosystem could hit the currency much harder than France's fiscal problems.

From a technical perspective, the daily EUR/USD chart shows the pair's price returning toward its fair value at 1.12. A breakout above this level would provide a basis for short-term long positions. A rejection would be a reason to increase existing short positions in the euro against the US dollar.