The rise in stocks of companies tied to artificial intelligence may exert a more substantial influence on currency markets than traditional economic factors, according to analysts at Bank of America. The bank suggests that currency hedging by global investors is becoming an increasingly significant driver of movements in major currencies.
Analysis indicates that the Japanese yen is experiencing the greatest downward pressure among G10 currencies, as foreign investors hedge their positions amid the rapid surge in Japan’s stock market.
From the second quarter of 2025 onward, the Nikkei 225 has significantly outpaced other major stock indices, triggering additional yen selling as part of hedging activities.
The bank estimates that these flows could have placed up to 10% downward pressure on the yen, partly explaining why the currency remains weak despite favorable balance-of-payments data and expectations of interest rate hikes in Japan.
Beyond Japan, the picture differs. According to the report, hedging flows have generally supported currencies such as the Swedish krona, Swiss franc, Canadian dollar, and Australian dollar, reflecting the dynamics of their stock markets and international investment positions.
The U.S. dollar may have also faced moderate selling pressure, as strong gains in American stocks encouraged investors to hedge currency risks.
Looking ahead, the report notes that the risk-reward balance has shifted in favor of a stronger yen. A slowdown in the AI-driven stock market rally, combined with the possibility of currency intervention by Japan, could reverse some of the recent weakening in the yen.
As a result, the bank favors short positions in CHF/JPY and CAD/JPY, indicating that both currency pairs could come under pressure if hedging flows driven by stock market trends begin to unwind. It also emphasizes that continued growth in AI-related stocks remains the main risk to this outlook.
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