Investing.com — The surge in artificial intelligence-linked equities may be having a bigger impact on currency markets than traditional economic fundamentals, according to Bank of America. The bank argues that foreign exchange hedging by global investors has become an increasingly important driver of major currency moves.
The analysis suggests the Japanese yen has faced the greatest downside pressure among G10 currencies as overseas investors hedge their exposure to Japan’s booming equity market.
Since the second quarter of 2025, the Nikkei 225 has significantly outperformed other major equity indices, prompting additional yen selling through hedging activity.
The bank estimates these flows may have weighed on the yen by as much as 10%, helping explain why the currency has remained weak despite supportive balance-of-payments data and higher Japanese interest rate expectations.
Outside Japan, the picture looks different. The report suggests hedging flows have generally supported currencies such as the Swedish krona, Swiss franc, Canadian dollar, and Australian dollar, reflecting the performance of their equity markets and international investment positions.
The U.S. dollar may also have experienced modest selling pressure as strong gains in U.S. equities encouraged investors to hedge currency exposure.
Looking ahead, the report argues that the risk-reward has shifted in favor of a stronger yen. A slowdown in the AI-driven equity rally, combined with the possibility of Japanese foreign exchange intervention, could reverse some of the recent weakness in the currency.
As a result, the bank favors lower CHF/JPY and CAD/JPY, saying both currency pairs could come under pressure if equity-driven hedging flows begin to unwind. It also cautioned that continued strength in AI-related stocks remains the biggest risk to that view.
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