The recent surge in equities linked to artificial intelligence is influencing currency markets in ways that appear to overshadow traditional economic fundamentals, according to an analysis by Bank of America. The bank emphasizes that foreign exchange hedging by global investors has increasingly become a key driver of significant currency fluctuations.
Specifically, the Japanese yen has been under considerable pressure compared to other G10 currencies. This decline is largely attributed to overseas investors hedging their exposure to Japan’s thriving equity market. Since the second quarter of 2025, the Nikkei 225 has consistently outperformed other major equity indices, leading to intensified selling of the yen through hedging activities.
Bank of America estimates that these hedging flows could have contributed to a depreciation of the yen by approximately 10%. This downward trend persists even in the face of encouraging balance-of-payments data and rising expectations for Japanese interest rates.
In contrast, other currencies are showing a different trend. The report indicates that hedging flows have generally bolstered currencies including the Swedish krona, Swiss franc, Canadian dollar, and Australian dollar, which are reflecting the positive performance of their respective equity markets and international investment positions.
The U.S. dollar has also felt some selling pressure, likely due to strong gains in U.S. equities that have prompted investors to hedge their currency exposures.
Looking ahead, the bank posits that the risk-reward scenario may be shifting in favor of a stronger yen. A potential deceleration in the AI-driven equity rally, coupled with the likelihood of Japanese foreign exchange intervention, could reverse some of the current weakness in the currency.
As a result, Bank of America is leaning towards a bearish outlook for both CHF/JPY and CAD/JPY, suggesting these currency pairs might face downward pressure if the equity-driven hedging flows begin to unwind. However, the analysis underscores that ongoing strength in AI-related stocks poses the largest risk to these predictions.
