The rally in artificial intelligence-related equities is exerting a growing influence on foreign exchange markets, with investor hedging flows increasingly outweighing traditional economic fundamentals, according to Bank of America.
The bank said currency hedging by global investors has become a significant driver of exchange rate movements, particularly among the G10 currencies.
According to its analysis, the Japanese yen has experienced the greatest downside pressure as overseas investors hedge their exposure to Japan’s surging equity market.
Since the second quarter of 2025, the Nikkei 225 has outperformed other major global equity indices, triggering additional yen selling through foreign exchange hedging activity. Bank of America estimates these flows may have weakened the yen by as much as 10%.
The bank said the hedging-related selling helps explain why the yen has remained subdued despite supportive balance-of-payments data and expectations of higher Japanese interest rates, both of which would typically provide support for the currency.
Elsewhere, the impact of hedging flows has been more favourable for several other currencies. The report said the Swedish krona, Swiss franc, Canadian dollar and Australian dollar have generally benefited, reflecting the relative performance of their domestic equity markets and international investment positions.
The US dollar, meanwhile, may have come under modest selling pressure as strong gains in American equities encouraged investors to hedge their currency exposure.
Looking ahead, Bank of America believes the balance of risks has shifted in favour of a stronger yen.
The bank said a slowdown in the AI-driven equity rally, coupled with the possibility of intervention by Japanese authorities in the foreign exchange market, could reverse some of the currency’s recent weakness.
On that basis, it favours lower CHF/JPY and CAD/JPY, arguing that both currency pairs could face downward pressure if equity-related hedging flows begin to unwind.
However, the bank warned that a continued rally in AI-linked equities remains the principal risk to its outlook, as sustained strength in stock markets could prolong the hedging activity that has weighed on the yen.
